colgate-palmolive: industry analysis - texas tech...
TRANSCRIPT
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Colgate-Palmolive
Russell Kerschen
Zach Glisson
Whitney Martin
Brian Ghaemmaghami
Darren Schreder
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Table of Contents
Executive Summary 6
Business and Industry Analysis 12
Company Overview 12
Industry Overview 14
Five Forces Model 20
Rivalry Among Existing Firms 21
Concentration and Balance of Competitors 22
Degree of Differentiation 23
Switching Costs 23
Scale to Learning Economies 24
Ratio of Fixed to Variable Costs 24
Excess Capacity & Exit Barriers 25
Threat of New Entrants 26
Economies of Scale 26
First Mover Advantage 28
Access to Channels of Distribution 28
Legal Barriers 29
Threat of Substitute Products 29
Relative Price Performance 30
Willingness to Substitute 30
Bargaining Power of Customers 31
Price Sensitivity 31
Relative Bargaining Power 32
Bargaining Power of Suppliers 33
Key Success Factors for Value Creation 33
Competitive Advantage-Broad Scope 35
Firm Competitive Advantage Analysis 38
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Accounting Analysis 43
Key Accounting Policies 43
Potential Accounting Flexibility 46
Goodwill & Intangible Assets 46
Employee Benefits 47
Legal & Other Contingencies 47
Actual Accounting Strategy 48
Qualitative Analysis of Disclosure 51
Quantitative Analysis of Disclosure 52
Core Sales Manipulation 53
Expense Manipulation Diagnostics 56
Potential “Red Flags” 62
Undo Accounting Distortions 63
Ratio Analysis, Forecast Financials, and Cost of Capital Estimation 65
Financial Analysis 65
Liquidity Analysis 65
Current Ratio 66
Quick Ratio 67
A/R Turnover 68
Days Sales Outstanding 69
Inventory Turnover 70
Inventory Days 71
Working Capital Turnover 72
Profitability Analysis 74
Gross Margin 74
Net Profit Margin 75
Operating Profit Margin 76
Asset Turnover 77
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ROA 78
ROE 79
Capital Structure Analysis 80
Times Interest Earned 81
Debt Service Margin 82
Debt to Equity 83
Internal Growth Rate and Sustainable Growth Rate Analysis 84
Financial Statement Forecasting 87
Income Statement 87
Balance Sheet 91
Statement of Cash Flows 93
Cost of Capital Estimation 93
Analysis of Valuations 101
Method of Comparables 101
Dividend Discount Model 107
Discounted Free Cash Flow Models 108
Residual Income Model 110
Long Run ROE Residual Income Model 111
Abnormal Earnings Growth Model 114
Credit Analysis 116
Analyst’s Recommendation 117
Appendix 118
Regressions 118
Income statement 131
Common size income statement 132
Balances sheet 133
Common size balance sheet 134
Cash Flows 135
Z-scores 136
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Cost of Debt 139
WACC 140
Method of Comparables 141
Residual income 144
AEG Model 145
Discounting Dividends 146
Long Run ROE Residual Model 147
Discounted Free Cash Flows 148
Ratios 149
Restatement Analysis 152
References 153
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Executive Summary
Investment Recommendation: Overvalued, Sell 5/05/2008 Share data
Observed NYSE: CL Share
Price as of 4/1/2008 $ 73.68
52-week range $63.75-81.98
Shares Outstanding 509.8M
Market Capitalization 37.56B
Percent owned by insiders 1.46%
Percent owned by institutions 71.9%
Book Value per share $4.103
Valuation Estimates
Multiples valuation
Trailing P/E $23.05
Forward P/E $17.21
P/B $17.73
D/P $.022
PEG $1.74
P/EBIDTA $23.03
EV/EBIDTA $12.75
Key 2008 financial data
Revenue 13.79B
Net Earnings 1.78B
Return on Equity 94%
Intrinsic Valuations
Discounted Dividends $22.96
Discounted FCF $57.12
Residual Income $24.66
LR ROE $49.97
AEG $24.66
Cost of Capital Estimations
r^2 Beta Ke
3-month .127 .455 07.4%
6-month .127 .455 07.4%
2-year .124 .444 06.8%
5-year .128 .455 07.4%
10-year .129 .452 07.4%
Published Beta 0.16
K d 6.16%
WACC bt 9.6%
Altman’s Z-score
2003 2004 2005 2006 2007
7.19 6.57 7.01 6.68
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Industry Analysis
Colgate-Palmolive was originally Colgate a small family owned soap and candle
company. They have since grown to merge with Palmolive to become the firm they are
today. They have widened their variety of products from soap and candles to oral care,
personal care, cleaning goods, and pet nutrition. Their initial public offering was in and
have since expanded their firm overseas and are recognized as one of the leading
suppliers in their industry. They are on almost every distributor’s shelves in the nation
and have become a recognized household name to most all consumers. Their main goal
is provide consumers with high quality products that will satisfy their everyday needs.
In the personal goods industry the main competitors are Proctor & Gamble,
Clorox, and Church & Dwight. All of these firms provide relatively the same products
that may simply differ in colors or scents. This makes their industry very dependent on
brand image and also susceptible to price wars. By having only a few large firms the
high concentration in this industry makes it very important for firm to stay up with the
competition on research and development practices. Consumers will always need the
products of this industry so the firms compete on low costs and advertising improved
products. For instance Colgate and many others have been promoting whitening
products for oral care.
The personal products industry has a high rivalry among existing firms, a very
low threat of new entrants, and a high threat of substitute products. In this industry
they also have a high bargaining power of suppliers and a low bargaining power of
buyers. This is because of the need for firms to have the large suppliers supply their
products to the consumers. The personal products industry is highly concentrated and
competitive among the existing firms.
The key success factors of the personal products industry are brand image,
product differentiation, and cost leadership. All of the products are very similar which
makes a firms brand image to the consumers. Since the firms have to compete on
price, finding ways to lower production costs is a must to make the most profits. If a
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firm can find ways to increase their appeal to the consumers while bringing costs to a
minimum it will allow them to gain market share.
Accounting Analysis
The best way for a firm to allow investors to understand their firm and make an
educated decision on whether or not to invest is to fully disclose their information.
Analysis of a firms accounting policies should identify how detailed and how much
information they are willing to disclose. Some firms have been known to hide certain
“unflattering” data by giving the minimum of what the SEC requires, this can in many
cases lead to accounting distortions.
Colgate-Palmolive does a fairly good job in disclosing their information whether it
has positive or negative effects on the company. Colgate also discloses the risks they
face associated with significant international operations and their restructuring
programs which implicates that they are willing to disclose data that may be misleading.
There are some areas of concern regarding Colgate’s 10-K disclosure of Goodwill and
Other liabilities. Goodwill consists of about 23% of our company’s total assets and that
number is increasing by about one or two percent each year. Colgate also discloses the
risks they face associated with significant international operations. Information
regarding our pension benefit plan and property leases seems to be somewhat limited
and is a minimal percentage of our company. Also, the 2004 Restructuring Program had
a very strong affect on the ROE which also might have led to some accounting
distortions. Compared to other firms in the industry our level of disclosure seems to be
above-average.
Financial Analysis, Forecast Financials, and Cost of Capital
Estimation
To be able to figure which items on the financial statements need to be
forecasted and what the main driver for forecasting is going to be we must first perform
an analysis on their statements. Recently, within the past 5 years, Colgate-Palmolive
has had a consistent growth rate of 7.4% which is consistent with the rest of its
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competitors. Because of firms such as Proctor & Gamble who have control of most of
the market, it is imperative that Colgate remain consistent and even try to increase
their growth rate to keep their market share. Our estimation of future growth rates for
years 2008-17 show to be 8%. For Colgate-Palmolive their asset turnover has averaged
1.33 over the past five years; with this we forecasted current assets as 36.8% and non-
current assets were 63.2% of total assets. Our CFFO from net sales was the ratio with
the most structure so we used the CFFO/sales ratio of 17% to forecast future cash
flows.
For the cost of capital estimation we first found the historical monthly stock
prices of Colgate for the past 5 years from Yahoo Finance and the S & P 500 prices, and
risk-free and market risk premium rates. We used this information to determine a Beta
of .46. As a result of low cost to equity found by the equation, we had to use a “back-
door method” to find cost of equity. These estimations were then put in the Cost of
Capital model to determine a before tax WACC of 9.60%, and an after tax WACC of
8.373%.
After collecting data and calculating ratios on our firm and their competitors
within the industry it is apparent that Colgate-Palmolive has had an increase in profits
over the past few years. Colgate has the highest asset turnover out of all of its
competitors and has been increasing each year which shows that their sales and market
share are also growing. Our debt service margin although has been declining over that
past few years which shows that they are having to more outside funds relative to
growth. These discrepancies have shown to be due to the 2004 Restructuring Program.
By using all of this data we will be able to better value the firm on whether it is valued
over, under, or fairly.
Valuations
After analyzing and compiling the business and industry, accounting analysis,
and forecasting the financial statements, an investor can perform future valuations to
examine the share price of the firm. Through using a choice of valuation models an
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investor can determine whether the company is overvalued, undervalued, or fairly
priced.
The method of comparables is the method that we use to value Colgate. It is
made up of 7 ratios that can be relevant to valuing a firm. When computing the
industry we excluded any of the outliers that would skew the industry’s average. The
P/FCF, EV/EBIDTA, P.E.G., and trailing P/E models all indicate that Colgate-Palmolive is
overvalued. The D/P and P/EBIDTA models however indicated that Colgate is
undervalued. This method of comparables is not a reliable valuation method because it
assumes all firms in an industry operate the same way, which is not true.
The Dividend Discount model gives us a way to estimate the value of a firm by
estimating the dividends we expect the firm to pay in the future. The dividends for
Colgate have been growing at a rate of about 10%. Our sensitivity analysis displays
that this model is sensitive to the inputs used. To achieve a price of $76.06, which is
very close to our observed price, we would need to increase our growth rate from 8%
to about 15%, leaving cost of equity around 16%.
The Discounted Free Cash Flows model uses expected future cash flows and
discounts them back to the current time period which allows for a valuation of the firm.
The cash flow model is rooted in basic theory of present value. The sensitivity analysis
performed indicates that the value of this company is overvalued.
The Residual Income model is one of the best valuation models used to value a firm. It
would take a positive growth rate and a reasonable cost of equity to achieve a share
price that is even close to the share price found. This model supports the conclusion
that Colgate is overvalued.
These are just a few of the many models that we used to determine that Colgate-
Palmolive is overvalued.
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Business & Industry Analysis
Company Overview
Colgate (NYSE: CL) was founded in 1806 as a small starch, soap and candle
business in New York City and later became incorporated in 1923. The company has
now grown and acquired other entities such as Palmolive in 1932 to become Colgate-
Palmolive. It has since grown to have sales today surpassing $12 billion and sells in
over 200 countries; about 75% of their sales are overseas. “Corporate headquarters are
still located in New York, NY. In the U.S. the company operates 60 properties in which
16 are owned; overseas the company operates approximately 270 properties in 70
countries.” (CL 2006 10 K) These facilities that Colgate operates in produce their
products which are separated into four different areas. Among these are personal care,
oral care, cleaning goods, and pet foods and nutrients. Out of these four products their
main source of income is oral care. Within the past few years Colgate has made a more
recognized name for themselves by introducing top of the line products such as
whitening strips. Colgate-Palmolive has many different brands that they sale some of
these products that they market are “Colgate®, Speed Stick®, Palmolive®, Murphy’s
Oil Soap, Irish Spring®, Softsoap®, AJAX®, Palmolive®, Suavitel®, and Hill’s®Science
Diet®;” (Colgate 10-K) many of these brands have been acquired because of the an
already firmly established consumer base. These products have made Colgate brand a
well recognized household name that “serves people around the world with well-known
brands that make their lives healthier and more enjoyable”. (www.colgate.com)
Colgate-Palmolive’s strategy is to focus on global new products to drive growth.
As of December 31, 2006 the Colgate-Palmolive corporation employs about
34,700 employees. Colgate’s market cap is 38.17B and the stock currently trades for
about $76. The company manages its business in two separate product segments: the
oral, personal, and home care: and pet nutrition. “Colgate is one of top leaders in the
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world in the oral care industry with having one of the most well known toothpaste
brands throughout the world. This is including the U.S., according to value share data
provided by ACNielsen” (CL 2006 10-K) As well as being a major leader in oral care,
Colgate-Palmolive holds a high “ranking” against many of their competitors with their
other products in both pet nutrition and the personal consumer and household
products. In Colgate’s 2006 10-K one of their main goals that is stated is to gain market
share. Just last year they purchased Tom’s of Maine, Inc., which was a company that
makes their products using all natural substances, which is becoming a growing
commodity in today’s environmentally aware society. Acquisitions such as this one goes
to show how aware Colgate-Palmolive is of their consumers needs and how they are
attempting to broaden their clientele. Colgate’s worldwide sales are mostly derived of
oral care products but one needs to take into account the pet nutrition products that
one might not recognize is a product of Colgate that makes up 14% of their total sales.
“Product quality and innovation, brand recognition, marketing capability, and
acceptance of new products largely determine success in the company’s business
segment.” (Colgate 2006 10-K)
Total Assests, Net Sales, and Sales Growth (*In Millions)
(Morningstar.com)
Total Assets Net Sales Sales Growth
2002 7,087 9,294 2.3%
2003 7,479 9,903 6.6%
2004 8,673 10,584 6.9%
2005 8,507 11,397 7.7%
2006 9,138 12,238 7.4%
2007 10,084 12,581 2.8%
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Colgate’s Worldwide Sales Percentage
(Colgate 2006 10-K)
These two tables are perfect examples to show the company’s growth and the
areas that they concentrate their business. The total assets, sales, and growth table
shows how the company is trying to pursue greater market share within their industry.
As one can see, their assets and sales have greatly increased from years 2002 to 2007.
There was a great increase in their sales growth around the year of 2004; this is due to
the company implementing a Restructuring program in 2004 that had a great impact on
their total sales.
Industry Overview
Colgate-Palmolive Co. is located in the Personal Products industry which is in the
Consumer Goods sector. Throughout this industry firms sell Oral Care, Personal Care,
and Home Care products, while some firms also compete in the Pet Nutrition segment.
The Personal Products industry is a highly competitive industry. Colgate Palmolive,
Proctor & Gamble, and other firms in this industry face competition in several aspects of
their businesses which includes; the pricing of products, promotional activities,
advertising, and new product introductions (CL 2006 10-K). The degree of actual and
potential competition in this industry consists of rivalry among existing firms, the threat
2006 2005 2004
Oral Care 38% 38% 35%
Home Care 25% 26% 28%
Personal Care 23% 23% 23%
Pet Nutrition 14% 13% 14%
Total 100% 100% 100%
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of new entrants, and the threat of substitute products. The Personal Products industry
faces a high level of competition with rivalry among existing firms for reasons that will
be discussed later in this analysis. There is also a high level of competition with the
threat of substitute products, but there is a low level of competition for the threat of
new entrants.
The Bargaining Power in Input and Output Markets determines the overall profitability
of the different firms in this industry. The high competition in this industry leads to
reduced profitability. While this industry faces a high level of competition with the
bargaining power of buyers, the level of competition with the bargaining power of
suppliers is minimal. These reasons will also be explained in further detail throughout
this analysis. The firms in this industry experience a net profit margin percentage of
17.63%, a gross margin % of 52.09%, and a return on investment of 12.25%
(www.reuters.com). According to Colgate’s 10-K report, a failure to compete effectively
could adversely affect the growth and profitability of any of these firms in the Personal
Products industry.
This section will analyze the Personal Products industry by examining the five forces
model. The Industry’s Key Success Factors (KSF) will then be explained, along with the
firm’s competitive advantage analysis. Finally we will analyze Colgate’s future
competitive analysis and discuss how well Colgate utilizes their KSF in the Personal
Products Industry.
The following is a chart showing the price history of Colgate-Palmolive over the
past five years. As one can see Colgate’s price has stayed along the normal trend for a
firm in the personal and household goods. Only was it after the 2004 Restructioning
Program was there a dip in their price value, this is due to uncertainty to how the firm
would react to the changes. But most recently Colgate has regained their market share
and their price is right around the largest firm of Proctor & Gamble.
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(Graph from money.msn.com)
Industry Growth
“Most stocks in the household & personal products industry have seen steadily growing
revenue and earnings over the past three years…as well as asset revenue growth.”
(Morningstar.com) To be able to stay alive in this industry Colgate and other companies
alike are going to have to use the most cost-effective decisions to rid of any unneeded
expenses. Colgate’s sales have been increasing in the oral care area; just this week an
article in the Wall Street Journal reported that “Colgate(R) Simply White(TM) is among
the easiest to use of the four leading at-home whitening products currently available on
the market.” (www.wsj.com) Although true it is obviously declining in others, which
means they are stagnant and are only going to be able to grow overall by finding a way
to take the shares away from other players. They are currently trying to do this, “The
Company said it expects double-digit earnings per share growth in 2008.”
(www.wsj.com) Although Colgate’s total assets seems to be increasing at a slower rate,
the industry itself is still growing at a significant rate because of other firms such as
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Proctor & Gamble who have greatly increased their shares. “Colgate also plans to
buyback up to 30 million shares over the next two years”. (www.wsj.com) The
competition to gain these shares of other firms can make one anticipate future price
wars. The charts below display their growth in comparison with the other firms in the
industry.
(Morningstar.com)
Stock: Colgate-Palmolive Company
Industry: Household & Personal Products
Index: S&P 500
This particular graph shows how Colgate is a little below the industry average
but has seemed to grow at the same rate as the rest of the industry. This growth in the
industry is due to peoples increased interest in personal hygiene. One of the biggest
“fad’s” especially in the U.S. has been whitening products for teeth and with these
products Colgate is one of the most used brands.
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Total Assets of Industry Over Past 6 Years (*In Millions)
(Morningstar.com)
This table displays that Proctor & Gamble are making huge increases in their
total assets over the past couple of years and at the same time, Colgate’s assets are
also increasing each year. Proctor and Gamble is the largest competitor within the
industry and has more than tripled their assets in this short time frame. This factor will
be better explained in the five forces model later; showing how hard it would be for
new entrants to come into an industry where there are already firms that hold so many
assets.
Colgate-
Palmolive
Clorox
Company
Church &
Dwight
Proctor &
Gamble
2002 7,087.2 3,630.0 988.2 40,776.0
2003 7,478.8 3,652.0 1,119.6 43,706.0
2004 8,672.9 3,834.0 1,878.0 57,048.0
2005 8,507.1 3,617.0 1,962.1 61,527.0
2006 9,138.0 3,616.0 2,334.2 135,695.0
2007 10,083.7 3,666.0 2,480.6 138,014.0
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Colgate’s Worldwide Sales (CL 2006 10-K)
*Net Sales in the U.S. for Oral, Personal and Home Care were $2,211.2, $2,124.2, and
2,000.3 in 2006, 2005, and 2004, respectively.
*Net Sales in the U.S. for Pet Nutrition were $897.9, $818.1, and $781.0 in 2006, 2005,
and 2004, respectively. (Colgate 2006 10K)
This table shows Colgate’s worldwide sales and is a nice visual to how this
industry does its business and the many opportunities they have to expand and grow.
Most of the industry’s firms are originated in the U.S. but if one looks at the sales in
2006 there was an even greater amount sold to Latin/South America than in the U.S.
This goes to show that there are many options in the personal products industry to
expand their firms outside of the U.S. and earn profits elsewhere. It is very obvious that
Oral, Personal and
Home Care
2006 2005 2004
North America $ 2,590.8 $ 2,509.8 $ 2,378.7
Latin America 3,019.5 2,623.8 2,260.0
Europe/South
Pacific
2,952.3 2,845.9 2,759.4
Greater Asia/ Africa 2,006.0 1,897.2 1,747.0
Total Oral, Personal
and Home Care
10,568.6 9,876.7 9,151.1
Pet Nutrition 1,669.1 1,520.2 1,433.1
Total Net Sales $ 12,237.7 $ 11,396.9 $ 10,584.2
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the need for personal hygiene and dental care will always be a high demand and is
increasing every day.
Conclusion
The personal products and household goods industry has always been a very
stable one; but with recent increasing interest in oral care the demand for new
innovative products has had a positive impact on the industry.
Five Forces Model
In any given industry, when a firm is being analyzed the analyst must first review
the potential profits of each of the industries in which their particular firm is competing
within. Due to the fact that the diversity of each industry will change in a somewhat
predictable manner over a period of time when a certain event may happen in the
economy the analyst need a way to predict what the outcomes are going to be. There
is a model that we refer to too do just this, it is known as the “Five Forces Model” and it
shows the influence of industry structure on profitability. The model is made up of two
main components. The first one is the degree of actual and potential competition, which
consists of the rivalry among existing firms, threat of new entrants, and the threat of
substitute products. The second one is the bargaining power of input and output
markets; made up of the powers of buyers and suppliers. Together these five forces
can help predict the industry’s profitability and be able to classify the important factors
of Colgate- Palmolive.
Within the five forces there is a high and low end that must be applied to each of
the forces to determine the volatility and to what extent each force affects a firm within
the industry. These five forces help an investor understand how and by how much,
different factors that could happen in an industry would affect the firm. The following
table shows a summary of the highs and lows within the personal product industry.
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Personal Product Industry
Rivalry Among existing firms - high
Threat of new entrants - low
Threat of substitute products - high
Bargaining power of buyers - high
Bargaining Power of suppliers – low
Rivalry Among Existing Firms
“In most industries the level of profitability is primarily influenced by the nature
of rivalry among existing firms in the industry” (Palepu & Healy). In the Personal
Products industry firms don’t have much room to compete aggressively when it comes
to price; but rather they are more conservative and compete on brand image, research
and development, and innovation. This makes the rivalry among existing firms very
high. The products in this industry are all relatively the same, with the exception of
flavors or scents, and this makes everything very competitive. One firms can not
necessarily charge a significant amount more for their product that is very similar to
others so they are forced to use other factors like brand image. Firms constantly have
to use their research and development teams to not only come up with new and
improved products but to also come up with ways to lower their costs.
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Concentration and Balance of Competitors
Market Share
Colgate-Palmolive- 38.17B
Clorox- 8.23B
Church & Dwight- 3.61B
Proctor & Gamble- 201.99B
Total- 252 Billion
This chart shows how competitive this industry is and how unbalanced the
market share is. There is a very high concentration in this industry, there are a select
few main firms including Colgate-Palmolive, J&J, Clorox, Church & Dwight Co., and
P&G; with Proctor & Gamble holding the largest amount of shares in the industry. With
their being the dominant firm they can to an extent set some of the rules of
competition, and the other firms will need to adjust their prices to compete with P&G’s
if they want to survive. For instance, the personal products industry generates
approximately $290 billion a year with Proctor & Gamble earning about $210 billion of
that and Colgate only $35 billion. (finance.yahoo.com) Colgate is still a prime
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competitor in this industry but with their sales being less than half of P&G’s they will
have to keep their prices within reason of the larger firm.
Degree of Differentiation
Firms in any given industry have a better chance to not have to compete head-on with
other firms if their products differentiated. In the personal products industry all of the
products are very similar between the firms which in turn makes it difficult to reduce
the head-on competition. It states in Colgate’s 10-k the composition and goals of their
company. By looking at other firms 10-k’s one can tell that most all firms in this industry
are separated into two separate areas the personal consumer goods and then the pet
nutrition. For the most part all business activities and practices follow the same
concept. This means that the firms are going to have to mainly compete not on product
differentiation but on price competitions. Firms in this industry are constantly trying to
have or show their uniqueness through customer satisfaction and brand image. The
degree of differentiation is very low in this industry.
Conclusion
Colgate-Palmolive and other firms in this industry must compete mostly on price or new
and improved ideas. All of these companies spend a lot of their money on research and
development; not necessarily for new products but more on ways to reduce costs on
production.
Switching Costs
In this industry the consumers have a high propensity to move, they are more
susceptible to move from one brand to another; the different scents, colors, and flavors
are not alone enough in most cases to keep a customer from switching if the price for
another brand with the same purpose is lower. This is just one more factor that forces
the firms to employ in price wars.
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Conclusion
The switching costs in this industry are significantly low and it would not be
unlikely for a consumer to choose for instance, toothpaste that has the same affects
that cost $3 compared to another that costs $4. This causes major price wars and
constant focus on brand image.
Scale to Learning Economies
The size of this industry is very large with a wide range of products. There is a
massive amount of price wars and competition to increase brand image and gain
market share. The products in this Industry will always be needed by people, and
especially in the oral area have been a growing interest. According to Colgate’s most
recent 10-K’s they have been gaining market share consistently over the past 3 years.
This is important in this industry to be one of the larger providers. Currently Proctor &
Gamble is the largest and they are able to “set” many of the standards in the personal
goods sector.
Conclusion
The scale to learning the industry and becoming one of the “big guys” is very
hard in this industry. But if a firm does not acquire a significant amount of market share
it will be even tougher for that firm to continue.
Ratio of fixed to Variable Costs
It is a necessity to lower variable costs in this industry in order to obtain the
lowest price for the customers. Colgate-Palmolive has made it one of its missions to
“aim for cost reduction across every category”. They have done so by “reducing
suppliers from 11 to 5 and by installing regional multi-year contracts with on-site
manufacturing programs that were put in place and record savings and total cost
reductions were achieved over 5 years.” (www.colgate.com) Although manufacturing
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strategies are always trying to be reduced the economy can also effect prices in other
ways such as the new price increases in crude oil will have an effect P&G just reported,
"Commodity and energy cost increases were higher than originally anticipated. Diesel
fuel, phosphates and resins, just to name a few, increased significantly during the
quarter. To offset this significant commodity and energy cost pressure, we have
announced a number of price increases” (www.wsj.com). These types of changes that
increase costs are also factors that change the ratio of fixed and variable costs.
Fixed to Variable Ratios
Colgate-
Palmolive
Clorox
Company
Church &
Dwight
Proctor &
Gamble
2002 .72 .41 .28 .60
2003 .74 .44 .28 .60
2004 .76 .41 .39 .66
2005 .76 .40 .39 .65
2006 .79 .40 .43 .66
2007 .82 .41 .42 .66
(Morningstar.com)
Conclusion
This table shows the current fixed to variable ratios of the main firms in this
industry. Colgate has one of the highest ratios in the industry followed by Proctor &
Gamble. This may show that Colgate needs to reduce prices to more efficiently to fill
their competence.
Excess Capacity and Exit Barriers
Exit barriers are higher when the products of the company are more
specific/specialized and regulations on exiting the industry are strong. The contracts
with suppliers and process of writing-off or ridding of assets are some of the barriers
that would be very difficult to overcome in the personal product industry. The problem
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of excess capacity is caused when the industry is larger than their consumer base. If a
firm is not filling their capacity they are not utilizing their fixed cost and will need to
reduce their price to compensate the difference and reduce their fixed to variable ratio.
By comparing the ratios above it shows that Colgate may be in this situation and may
need to find a way to reduce their variable.
Conclusion
Within the personal product industry one can tell that it is one with large scales
of economy and most all of the products are very similar and easy to replicate; which
makes it very obvious that there will be price wars between competitors. All factors in
this industry combined lead to the rivalry among existing firms to be high.
Threat of New Entrants
The easier it is for a firm to enter an industry the more competitive the industry will be.
For the personal product industry most firms are already established very well, which
would make it very difficult for others to enter.
Economies of Scale
In this industry, with the firms being so large any new entrants would ultimately
suffer in the beginning by having to buy in large capacity and they would then not be
able to compete with the present firms on price. The personal products industry strive
on reducing costs and as one can see in the following table that one of the main goals
is to increase the gross margin. As you can from the graph, firms gross margin
percentages are increasing over the years. This is a result from lowering the cost of
goods sold each year. Colgate’s gross margin percentage appears to increasing at a
slower rate than a couple of the other firms.
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Comparative Gross Margin
2002 2003 2004 2005 2006 2007
Colgate-Palmolive .55 .55 .55 .54 .55 .56
Proctor & Gamble .48 .49 .51 .51 .51 .52
Clorox .43 .47 .45 .43 .42 .43
Church & Dwight .30 .30 .36 .37 .39 .39
Total Assets/Growth (in Millions)
(Morningstar.com)
Conclusion
This asset graph goes to further show how large in scale Proctor & Gamble is
compared to the other main firms. Although Colgate has maintained their total assets
and continued to slightly grow since 2004 Proctor & Gamble has the industry pretty
much in the palm’s of their hand and has the ability to set many standards which would
make it very difficult for and new firm to enter.
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First Mover Advantage
First-movers might be able to set industry regulations and be able to acquire
harder to come by government licenses. These first movers have the advantage to gain
higher market share, and the biggest advantage of all in this industry, to create patents
on products. The first mover in this industry is clearly P&G who has over half of the
total market share and sets many of the standards. In this sense new entrants would
have a difficult time finding cost effective prices with suppliers and would also have no
name recognition on the shelves. This gives the first movers in this industry a very
significant advantage. These first movers of the personal consumer goods are obviously
firms such as Proctor & Gamble and Colgate-Palmolive. It would be extremely difficult
for a new firm to enter and gain the name recognition and gain confidence with buyers.
Conclusion
In this industry the first-mover advantage is a very important issue concerning
those who are considering on entering into this industry. The personal products industry
already has a high concentration of firms and also already has its standards set by one
of the main firms. So this is just another issue that makes the threat of new entrants
low.
Access to Channels of Distribution and Relationships
This is very important to any new entrants and also analysts to look at because
this can determine how difficult or threatening it would be for a new firm to enter and
the ease they would have with gaining support from suppliers. A key factor in this
industry is customer relationships and the limited capacity on the shelves of
participating distribution chains. These factors can act as significant barriers to entering
an industry. For instance, there is already a high competition between existing firms of
the personal product industry for shelf space. With P&G, Colgate-Palmolive, and J&J
products having some of the most well known products that consumers have become
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accustomed to it would make new consumer goods hard to come-by shelf space
because of the fact that retailers want a product that can sell at reasonable price and
create a high turnover rate, and brand recognition is key in this proposal.
Legal Barriers
Legal barriers can at times hinder the ability to enter and industry but within the
personal products there are not too many variables that exist. The main one that might
cause some difficulty would be the ability receive license to receive a few certain raw
materials and acquire patents. For instance, in Colgate’s most recent 10-K there was a
product using all natural chemicals in it that was delayed in production because of FDA
regulations; but because of the experience in their industry they were able to find the
problem quickly and the product was out by the end of the year.
Conclusion
Overall the treat of new entrants is significantly low. There are many legal
barriers and FDA regulations that have to be kept when dealing with personal products.
The ability to create a brand image and compete with the low costs of the first movers
would be extremely difficult and not practical for one to try and attempt.
Threat of Substitute Products
There is a threat of substitute products when there are two or more products
that perform the same function or purpose. “The threat of substitutes depends on the
relative price and performance of the competing products or services and on customers’
willingness to substitute.” (Business Analysis) In this industry there is a very substantial
amount of possible threats in this area because all firms and products are extremely
similar and can easily be substituted.
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Relative Price and Performance
Customers’ perception on whether or not a product serves the same purpose
depends mainly on if they can do so, and at the same cost. In this industry there are
many products that can be easily substituted by generic brands that are lower in price.
Brand names like Colgate, Scope, Kleenex, etc. are able to price their products a portion
above the generic substitutes because of their relationship with the customer and brand
recognition. Another factor though is that in the personal products industry a higher
price is viewed by the customer of that product having a higher value, and they will
receive a better performance from that particular brand. So in this industry it depends
on the customer and if they are willing to pay a little extra for the higher quality or to
go with the generic brand for a little less. This decision in a lot of cases is not a difficult
one because of the fact that all of the products are so similar there really is no way for
the gap in price to be that significant and the deciding factor usually comes down to
name recognition.
Willingness to Substitute
In the personal products industry the willingness to switch is normally very high,
especially when it comes to looking at the buyers’ as retail stores. For example in the
oral healthcare area there are the few top competitors such as Aquafresh, Colgate, &
Crest that are now household names. The retail stores know they will have a high
turnover rate with these brand names and they also have good relationships with those
firms because of it. Since all of these products perform the same function customers
are usually willing to “try-out” a new product or different brand that claims to create the
same outcome as their previous product.
Conclusion
In the personal products industry it is clear that the threat of substitute products
is extremely high. Since there are more than two products that perform an identical
purpose it would make it very hard to create a large difference in price. The main way
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for a company to gain more sales would be by brand recognition and making their
product a household name. These reasons also go to show how in an industry like this
firms are almost forced to engage in price wars.
Bargaining Power of Buyers
Every morning, people wake up relying on personal care products to survive daily
routines with special focus on personal hygiene, clean clothes, and home care. In order
for the consumer to pull items off the shelves, another buyer within the industry stocks
inventory. This customer is the intermediary between the consumer and the personal
care companies that generate these products. The intermediaries consist of retailers
and distributors that serve the final consumer: the shopper.
Industry competitors such as Proctor & Gamble, Colgate-Palmolive, Clorox, and Church
& Dwight are the main sources of personal care products. Furthermore, they do not
directly sell mass quantities to the shopper, but instead sell mass inventories to
distributors such as Wal-Mart & Target. When selling to distributors and retailers, firms
must keep in mind that actual profits are relative to the bargaining power a firm has
with suppliers and buyers.
In retrospect, distributors/ retailers have the bargaining power in this field due to their
ability to negotiate price per large purchased quantities. Plus, the industry competes on
undifferentiated products firm wide, which yields more bargaining power to buyers as
they have ability to switch products. They also have ability to substitute products
leaving firms battling on lower prices. Overall, the bargaining power of buyers is a
component of the five forces model and is essential in evaluating the total profitability
added to each competing firm.
Price Sensitivity
Price sensitivity, a determinant of buyer power, decides the attitude of buyers in
respect to bargaining on price. Since products are similar and associate with low
switching costs in the industry, firms want to obtain products with high value and high
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quality. Personal care products are needed by the average shopper because products
such as toothpaste, laundry detergent, and cleaning products are imperative. Thus,
searching for the lowest price of undifferentiated products within this industry is
important to retailers own cost structure. In addition, the quality of the product is
important because it can also determine price as a factor in purchasing. PCP
competitors strive to put quality on the shelves. Retailers have to maintain quality
products because shoppers have ability to easily switch. Finally, due to undifferentiated
products PCP market customers are high price sensitive.
Relative Bargaining Power
The key factor to bargaining power is what the cost will be to not do business
with the buyer and vice-versa. For example Proctor & Gamble is one of the largest firms
in the industry and they have some bargaining power because retailers want their
products on the shelf. However, P&G needs their products on the shelves in order for
the firm’s survival. “Although P&G is a very large company, its future is dependent on
buyers. Wal-Mart and affiliates represent 15% of the firm's total revenue in 2006. This
percentage of total revenue gives Wal-Mart the ability to bargain with the Company for
lower prices, which would result in lower earnings.” (www.wsj.com) This holds true for
most firms in this industry because the buyers have a very high bargaining power.
Firms provide customers with their products in a convenient manner, but this is
invaluable to firms due to the products they sell.
Conclusion
So the relatively high bargaining power of the buyers in this industry has a huge effect
of how firms operate. The variety of undifferentiated products in this industry is the
main driver that increases the buyer’s bargaining power. Buyers are extremely price
sensitive, which requires them to negotiate lower prices. Firms in the personal product
industry have to comply with the buyers in order to continue being competitive in this
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market, or else buyers will purchase these goods from competitors that have lower
prices.
Bargaining Power of Suppliers
There are a great number of suppliers in the personal products industry and they must
compete on prices along with quality, speed, and innovation. Because there is a high
number of companies and suppliers in this industry, suppliers power is minimized.
Firms within this industry have many suppliers all around the world from which they get
their resources and services. If suppliers want to be successful and compete in this
industry, they must be creative and provide “unsurpassed customer service, proven
processes, and technology tools that are used” (www.colgate.com). There is a high
threat of substitute products in this industry which takes away from the power of these
suppliers. Suppliers are able to compete successfully by offering low and competitive
prices and high quality packaging, raw, and indirect materials. Suppliers must create
and maintain good relationships with these companies. Because the products and
services are undifferentiated and the cost of switching is low, suppliers do not have
much power over pricing. Companies such as Proctor and Gamble and Colgate have
developed a Supplier Diversity Program which reaches out to woman-owned and
minority owned businesses. “This helps build supplier diversity and develop mutually
beneficial supply relationships (Colgate). This Supplier Diversity Program creates even
more competition with the other suppliers because now firms have more of a variety of
suppliers from where they can receive their materials and resources. In conclusion, it is
very difficult for suppliers to control prices within an industry where there are many
firms and a number of substitute products available to customers.
Key Success Factors for Value Creation
The personal product industry, a very competitive market, has to ensure the strategies
they are using are the right ones. In terms of differentiation versus cost leadership
strategies, PCP firms rely on both in order to survive the competitive markets. However,
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firms do not equally weight both strategies, but focus more on differentiation. Such
strategies or success criteria are important in evaluating firms in the PCP market.
According to Colgate’s 10-K, “product quality and innovation, brand recognition,
marketing capability and acceptance of new products largely determine success in the
Company’s business segments.” New product development is a must in this industry in
order to compete with the competitors in the industry. Along with new product
development and innovation, is the brand recognition for each product. In order to be
effective in this industry you must reduce costs as much as possible, and for some
companies in this industry, that might become a barrier to remain highly competitive.
Expenses just decrease the bottom line of the firm.
These personal care products that you currently see at certain stores such as
Wal-mart, Target, and Walgreens are very dependent on how much success the
company has in a given year. This is obvious; however, new product
development/innovation creates a huge factor in the future growth in the company. ”
The growth of our business depends on the successful development and introduction of
new products (Colgate 2006 10-K).” Firms in the industry should always want to
develop that edge over existing products by creating new and better products in order
to stay one step ahead of the competing firms. Not only that, but they should want to
market them heavily and get the product to the public faster than its competitors.
Suppliers also affect the company’s value. Firms in this industry try to do
business with the supplier who will give them the lowest cost with the best quality. This
will not only reduce their raw materials costs, but also keep them highly competitive
overall. Firms in the personal care product industry are usually trying to allocate almost
identical resources, so these suppliers’ costs are more important than some might
believe.
In order to continue to be a competitive firm in this industry of personal care
products, firms must create value by implementing certain things. This includes
reducing costs maybe by finding that new and better supplier or a different ingredient
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in the product that works the same but costs less. This industry is different from others
in that certain products, such as the oral care market, are always changing.
Industry Classification – Competitive Advantages Broad Scope
In order for a firm to successfully compete in the personal care products market, it
must maintain both a differentiated product and cost focus. In order to effectively
promote a cost leadership strategy, companies within the personal care industry have
to emerge as a cost leader. Through economies of scale and scope, efficient production,
and controlling low input costs companies such as Colgate-Palmolive and Procter and
Gamble are able to efficiently implement a cost leadership strategy. However, being a
cost leader is only part of the spectrum as the industry requires differentiation of
product, which yields focus on investment in brand image, research and development,
and innovations. Through these strategies companies are able to compete at the
industry level and maintain a competitive edge over new and existing entrants.
Furthermore, implementing these characteristics contributes to the overall goal of
maintaining a superior value chain in comparison to competitors.
Economies of Scale
Achieving economies of scale occurs, “[w]hen more units of a good or a service can be
produced on a larger scale, yet with (on average) less input costs, economies of scale
(ES) are said to be achieved (www.investopedia.com). Given that the market for
personal care products is highly competitive, economies of scale is a requirement to
succeed against competitors. By doing so yields an influential force over the bargaining
power of suppliers, which leads to lower input costs. Within the industry economies of
scale also contributes to the increase in market share. Thus, increases competitive
advantage and lowers the willingness of new entrants into the market.
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Economies of Scope
Increasing the scope of distribution and marketing is another key element to the
personal care product market and economies of scope is an aimed strategy to
accomplish this element. Attention given to distribution is a must as firms are required
to mass distribute at the demand level in order to successfully compete within the
market. If different products are not provided then the consumer demand declines;
therefore, a firm must offer a variety of products to compete in this industry.
Lower Input Costs
Input costs are an essential focus to the cost leadership approach and strategy. Due to
high fixed costs associated with the operating activities, lowering input costs is the most
effective way of managing prices. Maintaining these low input costs not only yields a
competitive advantage when products are sold to retailers, but produces higher profits
margins. Since large amounts of undifferentiated products exist in the personal care
product industry, companies are subject to competition in cost leadership. Therefore, it
is imperative to lower the cost of their products when selling to large retailers, because
the buyers have a high amount of bargaining power. If Colgate-Palmolive’s product
costs are too high, the retailers will purchase the competitors product instead.
Currently, the personal care product industry is experiencing rising prices in input
costs, which affects all companies’ input prices. Furthermore, with energy and
commodity prices increasing, input costs are only heading up. According to P &G’s
finance chief, Clayt Daley, "commodity and energy cost increases were higher than
originally anticipated. Diesel fuel, phosphates and resins, just to name a few, increased
significantly during the quarter. To offset this significant commodity and energy cost
pressure, we have announced a number of price increases, which go into effect during
the January-March quarter (WSJ).” As prices increase consumers are negatively
affected as retailers are forced to raise prices. This chain reaction is common amongst
all competing firms and forces the consumer to spend more money.
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Ratio of Fixed to Variable Costs
This ratio is used to explain how well a firm is efficiently utilizing its resources. To
calculate this ratio you take the fixed cost, which is the selling, general, and
administrative cost and divide them by the variable costs, or the cost of goods sold.
Efficient companies focus on minimizing variable cost in order to increase productivity.
These ratios are used to compare companies within the same industry. “If the ratio of
fixed to variable costs is high, firms have an incentive to reduce prices to utilize
installed capacity (Business Analysis). Colgate’s ratio indicates that they need to reduce
prices to utilize installed capacity.
Brand recognition
Earning higher market share in the industry and advertising help increase brand
recognition. This is very important in differentiating a company’s products from the
large variety of substitutes. A firm has to provide quality products at low prices in order
to build buyer loyalty. This is very important in an industry that has very low switching
cost between similar products. Having a higher valued trademark leads to increased
shelf-space in retail stores, which attracts consumer’s preferences in purchases.
Colgate-
Palmolive
Clorox
Company
Church &
Dwight
Proctor &
Gamble
2002 .72 .41 .28 .60
2003 .74 .44 .28 .60
2004 .76 .41 .39 .66
2005 .76 .40 .39 .65
2006 .79 .40 .43 .66
2007 .82 .41 .42 .66
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Through investment in brand recognition, firms are able to support consumer attraction
in a certain way and further promote the differentiation principle required for
competition.
Research and Development
By investing in research and development, firms are able to directly target the
particular consumer taste at any current time period. In order for firms to compete on
types of products, uniqueness of products, and preference of products research and
development is essential. When firms know what the consumer wants, they can target
a certain product bundle and emphasize attention towards that product in order to gain
market share over competitors. For instance, Colgate-Palmolive might research what
toothpaste consumers are particularly interested in: plaque control versus whitening
versus mint flavored toothpaste. The following table displays that research and
development are very important to the growth of this company. The increase each
year is a very noticeable number.
Colgate-Palmolive Research and Development (In Millions*)
2003- 204.8
2004- 229.2
2005- 246.3
(Colgate-Palmolive 2006 10-K)
Firm Competitive Advantage Analysis
“Product quality and innovation, brand recognition, marketing capability and
acceptance of new products largely determine success in the Company’s business
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segments.” (2006 10-K pg 2) Product quality is very important to differentiate their
products from other competitors. The Hills Pet Nutrition segment of the business
specializes in selling high quality pet food world-wide in over 90 countries. So Colgate
utilizes product quality to effectively differentiate its product from other firms such as
Iams and Pedigree. Product quality for oral care is a requirement as stated above in the
competitive strategy due to high competition amongst companies. In order to
effectively promote products, firms have to focus on increasing quality or they might
lose potential customers and market share. When assessing Colgate-Palmolive,
promotion of quality plays a significant role in adding value to the firm and yields an
increase in gross profit margin.
Economies of Scale
Colgate-Palmolive fosters what they refer to as a supplier diversity team. They have this
team in order to meet investor’s expectations for quality, speed, innovations and cost
effectiveness. Lower costs would drive growth for the future of the company. This
would allow Colgate to lower their prices and gain a larger market share. It would also
reduce the threat of new entrants into the personal products industry since they cannot
compete with these low prices. This team also strives to gain these supplier relations
with the smaller businesses so they can have higher growth in the company and also
higher funding for growth. Colgate has also innovated new different products. Their
research and development team has come up with new product lines for things such as
oral care toothpaste. The R&D of Colgate strives not only to make the superior product
variety better, but also tries to make a simpler product design which would ultimately
reduce the input cost of the product as well. With this supplier team trying to be
efficient with the speed of product design, it will again lead to Colgate being able to get
the products on the shelves faster while also cutting operational costs.
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Lower input costs
In the personal product industry, we have seen that that’s, such as toothpaste,
are not that different from each other. In that case they must compete on a cost
leadership basis. Colgate strives to lower their input cost so that they can have that
competitive over the industry. They do that by trying be innovative with their product
designs and the utilization of their assets. All company’s in this industry use many of the
same suppliers so it would be hard to cut costs in that area, however Colgate tries to
always find the new supplier that might not be as big, but offers a lower price is always
wanted.
Product Innovation
Product innovation also contributes to the overall firm’s value. Colgate-Palmolive
currently invests material amounts of money towards research and development in
order to promote certain product creations. Furthermore, Colgate’s investments in
research and development have increased over the past three years. According to
Colgate’s 2006 10-k, “company spending related to research and development activities
were $241.5 million, $238.5 million, and $223.4 million during 2006, 2005, and 2004,
respectively.”, thus, product innovation is an important factor in the personal care
product market and companies are required to focus attention towards it. If proper
attention is not given, firms are negatively affected and competition is decreased. In
addition, knowing what the customer wants at all times contribute to the overall
potential profitability of the firm. Also, Colgate-Palmolive has to focus on developing
and funding technological innovations (Colgate-Palmolive 2006 10-k). This element
allows for an aggressive competing strategy against everyone else in the market and
provides additional value to Colgate’s underlying key success factors. Not only is it
important to focus this attention, but it is highly recommended to be the first to launch
new products. If the firm has strong capabilities in doing so through the distribution
channels then they are at an advantage.
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Brand Recognition
After emphasizing the importance of product quality and innovations, Colgate-
Palmolive has to maintain their current market share of $38.17 billion through
increasing the reputation of their brand image. With retailer’s strength in bargaining
power, Colgate-Palmolive currently has to increase brand recognition so they can
maintain positive relationships with retailers. The firm is capable of doing so by
implementing aggressive marketing strategies through effective advertising. Within the
past 5 years Colgate has had an average total increase of marketing expenses of 11.5%
per year. These marketing costs are expensed under selling, general, and
administrative costs. Marketing strategies such as advertising or introducing a new
product to regain attention from the consumers is considered almost as an investment
to the Company by helping increase net sales. Moreover, Colgate states “our ability to
compete also depends on the strength of our brands, whether we can attract and retain
key talent” (Colgate 10-K) Relationships with “key talents” are vital both at an industry
and firm level; thus, Colgate-Palmolive does include brand image in its fundamental
strategy.
Increase in Marketing Expense
2003 2004 2005 2006 2007
7.5% 10% 12% 11% 17%
The Future: Restructuring Programs
At the firm level, Colgate-Palmolive is currently making efforts to streamline
manufacturing processes so they can “enhance the Company’s global leadership
position in its core businesses (Colgate-Palmolive 2006 10-k).” It is believed that by
implementing these efforts, Colgate will increase their competitive abilities and
contribute to their cost leadership strategy mentioned as part of the industry’s overall
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strategy. The restructuring includes closing warehouses and reducing their workforce by
12% (Colgate-Palmolive 2006 10-k), which leads to decreased operating costs. By
lowering the operating costs, the firm is focusing on promoting high gross profit
margins, but at the expense of losing workers.
Restructuring Program Expenses
Year Expenses ($ millions)
2004 $65.3
2005 $80.8
2006 $153.1
*From Colgate-Palmolive 2006 10-k
As the above table states, the costs of restructuring have recently increased from
the years 2004-2006. Therefore, Colgate is currently increasing its focus on these
programs to increase savings that range from $325 - $400 million (before tax). So, the
firm plans on spending anywhere from $750 - $900 million on the restructuring
program to promote long-term growth, which is expected to begin in the year 2008.
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Accounting Analysis
Identification of Key Accounting Policies
To identify the key accounting policies of a company one must directly relate
them to the previously discussed key success factors. Their disclosure is very high, but
there are some discrepancies with their leases due to the fact that they do not record
them till year 2008. Colgate’s success factors greatly depend on brand recognition,
advertising, research and development, and the power of key retailers and their policies
that can affect pricing. Analysis of a firms accounting policies should identify how
detailed and how much information they are willing to disclose. For example, in 2004
Colgate implemented a restructuring program that they will continue to implement in
future years but they state in their 10-K that they cannot guarantee that it will not
exceed expected costs, and if the program fails they will experience significant losses.
They list these under selling and administration expenses and have a note underneath
that explains how these expenses will in time be beneficial for the company. Goodwill
and other intangibles assets are subject to an impairment test every year. This goes to
show how Colgate is attempting to give their shareholders all available information even
if it is not entirely beneficial to the value of their firm.
Some of Colgate’s main supply of income comes from global operations. The
Company markets its products in over 200 countries and territories throughout the
world. This makes it very important to realize the currency derivative risk and the
management risk of exposure. Colgate allocates in their expenses the exchange rates
under investment losses. “Investment losses (income) consisted of gains and losses on
foreign currency contracts, principally due to declines and increases in the fair value of
foreign denominated deposits which are economic hedges of certain foreign currency
debt but do not qualify for hedge accounting.” (10-K 2006) They try to reduce the high
risk and volatility by managing on a global level the working capital, and implementing
various techniques of selective bargaining in local currencies and entering into
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derivative dealings with ordinary features. The interest rates also play a big part here
and are managed in a way to reduce the gap between fixed and floating rates. They
accommodate this by issuing debts and interest rate swaps. During times of extreme
measures they can use some of their long term or future contracts to reduce the
volatility. There is a risk in this that could end in a credit loss but very unlikely since
firms they deal with have at least an “AA- or higher long term debt rating.” (10-K 2006)
Another issue is their defined benefit pension liabilities and post-retirement expenses.
In this area they use for accounting policies very complex and differentiated ways to
accrue for accounting purposes. “Defined benefit and other postretirement plans are
based on a yield curve constructed from a portfolio of high-quality bonds for which the
timing and amount of cash outflows approximate the estimated payouts of the U.S.
plans. For the Company’s international plans, the discount rates are set by
benchmarking against investment-grade corporate bonds rated AA or better.” (10-K
2006) Another rate they look at with the most judgment for post-retirement is the
current medical cost trend rate. This goes to show that with these accounts they stay
as recent and up to date with the rates and regulations as possible to show accurate
liabilities. Colgate’s defined benefit assumptions are based on actuarial assumptions,
and the terminations of plans are then later related and accrual resides in pension and
other retiree benefit liabilities.
Research and Development, brand recognition, as well as acquisitions of new
companies are all very significant for Colgate and other firms in the personal care
industry to account for and in an accurate way. Recently Colgate acquired Tom’s of
Maine to their line of products. With newly acquired investments they allocate all assets
and liabilities at that time based on a fair value of everything assumed. These recent
acquisitions also have an impact on the Goodwill. The main increases in net goodwill in
2006 have come from the buying of Tom’s of Maine. In 2006 Goodwill and other
intangible assets accounted for nearly 22% of Colgate’s total assets. This is a significant
amount and investors should look closely at how the company is evaluating their
goodwill from year to year and if it seems to be fairly valued. It is also wise for an
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investor to know that “Goodwill and indefinite life intangible assets, such as the
Company’s global brands, are subject to annual impairment tests. Other intangible
assets with finite lives, such as trademarks, local brands and non-compete agreements,
are amortized over their useful lives, ranging from 5 to 40 years…” (colgate.com)
Colgate suffered no impairments in 2006. “ The ability to compete also depends on the
strength of our brands, whether we can attract and retain key talent, and our ability to
protect our patent, trademark and trade dress rights and to defend against related
challenges brought by competitors.” (colgate.com). The research and development area
of this company is increasing every year and the company’s 10-K openly states this fact
as a necessity for the company to grow and to meet its consumer’s needs. Since there
are uncertainties of exactly where they research and development is being allocated it
is required by the GAAP for it to be expensed. When an enhancement of an existing
product or creation of a new product is the result of research and development then the
legal fees, trademarks, and patents will all be amortized against its useful life.
Colgate can be very conservative in some of their accounting techniques. For
example where most firms in the personal products industry would record all shipping
and handling costs as cost of sales; Colgate allocates the shipping and handling along
with all the other expenses associated with cost of goods sold and selling and
administration expense. So instead of taking the route of their total net income they
were conservative and fully recorded the costs. This is another thing an investor would
need to know to accurately be able to tell the value of a company and how they tend to
account for their costs and other liabilities.
The relative mix and use of operating leases versus capital leases with Colgate is
not very absolute. The total capitalized leases are about $33.3 million where as
operating leases exceed $525 million. The firm does not disclose information on why
their mix is so volatile. These types of key accounting policies could over or understate
the assets and/or expenses if not accounted for thoroughly. It is also unnecessary to
disclose any off-balance sheet collateralized debt obligations because the firm does not
have any.
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Accounting Flexibility
A firm’s accounting flexibility is how companies allow management to estimate
different accounting policies while also following the guidelines of the General Accepted
Accounting Policies (GAAP). With respect to Colgate, they take into account three
important items that affect their accounting decisions: goodwill, employee benefits
(mainly post-retirement), and legal and other contingencies. All of these are very
flexible and heavily rely on management’s judgment.
Goodwill and Intangible Assets
In May of 2006, Colgate purchased 84% of Tom’s of Maine Inc. outstanding
shares, a leader in toothpaste and deodorant, and allowed Colgate to excel in the fast
growing market of the personal products industry. This acquisition, along with the
company’s ownership in Romania and Poland’s subsidiaries, is the main cause for the
increase in the net carrying value in intangible assets and goodwill from 2005 to 2006.
Goodwill rose 11% within this one year span, while intangible assets rose 6%. We can
expect that Goodwill will remain steady unless there is another significant acquisition of
a company, like Tom’s of Maine Inc. When Colgate impairs their goodwill and intangible
assets they use estimates including future cash flows, growth rate and a selection of
discount rates. However, these indefinite intangible assets, such as trademarks and
global brands, along with goodwill, are required to have annual impairment tests. The
other finite life intangibles are amortized anywhere from 5 to 40 years depending on
their useful life. The reason this is important is the flexibility allowed for the managers
in making these useful estimates in order to account for goodwill. Managers are put in a
situation of trust and must uphold that trust to make the right calls for the company’s
future economic status. All in all, firms in this industry show that they are flexible in
letting managers make decisions.
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2005 2006
Goodwill 1874.7 2081.8
Intangible Assets 783.2 831.1
Total Assets 8507.1 9138.0
Amounts in Millions (2007 10-k)
Employee Benefits
Colgate has many employee benefits, whether it is medical, stock-based options,
or pension plans. Most of these relate to post-retirement benefits. Firms in not only this
industry, but many others, have to remain flexible when dealing with these types of
benefits since they deal with estimating expected salaries and other employee related
issues. For instance, healthcare benefits need to be very flexible. This is because that
everyone does not have the exact same health. Some people might need a surgery
while others will not. Regarding medical estimations, Colgate uses a medical cost trend
rate in order to estimate for future medical expenses. Colgate uses assumed that in
2005, the rate to increase was approximately 10%. They estimated it would decrease
for the next 5 years by 1% each year so that they would ultimately arrive at a 5%
increase per year. Pension plans also have to be flexible. According to the 2007 10-K
report of Colgate, pension plans and benefits rely on how long the employee has been
with the company and their career earnings. So the company has to decide for each
Legal and Other Contingencies
These reserves are based on the management’s assessment of any risk of a
potential loss. The managers’ assessments are reviewed each period and changes are
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made if needed. The accounting decisions of managers have to be very flexible to due
how many legal suites there are in a given year. Although the cash flow statement
could be dramatically affected by a one-time impact of such legal or contingency issue,
the manager’s opinion is what matters most and his responsibility that it will not affect
the financial position of the company.
Conclusion
Accounting flexibility in firms relies on how managers make judgment calls while
also abiding by the GAAP. The reason that Colgate is very flexible in accounting policies
is that the company really relies on managers to make decisions. Like in the medical
benefits, there are many different cases and the company has to be flexible in order to
take care of each one. This also goes a lot with legal proceedings and goodwill. All of
these need high flexibility when making accounting assessments.
Accounting Strategy
Disclosing pertinent information to investors is ideal in maintaining a relationship
and done in order to abide by GAAP. However, following GAAP is possible through
either a high or a low level of disclosure. In order for a firm to generate a high level of
disclosure they go beyond just satisfying GAAP. Furthermore, through extensive
discussion in areas of the 10-K report and segment reporting a high disclosure is
obtainable. The above-identified accounting flexibility allows managers to communicate
the true performance of the firm or gives them the power to distort real value. Along
with an identified level of disclosure, the company implements either an aggressive or a
conservative accounting policy, which affects the way earnings are reported.
Within the personal care product market, Colgate-Palmolive maintains a high
level of disclosure as it effectively introduces its segments both by category and per
global operations. These segments are primarily divided into two categories: oral,
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personal, and home care; and pet nutrition (Colgate-Palmolive 10-K). Since Colgate
relies heavily on its global operations, the oral, personal, and home care segment is
then divided amongst the following continents: North America, Latin America,
Europe/South Pacific, and Greater Asia/Africa. While disclosing this information is
relevant to its global operations, Colgate does so in order to relate valuable information
to the investor. Reporting its emphasis on global operations allows investors to take into
account the affect of other factors such as interest rates and economic instability in
other countries. Plus, introducing its global involvement supports cost leadership, a key
policy in competition for market share in the personal care product market.
While revealing the above mentioned information in the “Management Discussion
& Analysis” section of their 10-K, Colgate also discloses the affect of the 2004
restructuring program on corporate segments opposed to operating segments.
Revealing this information prevents assumptions of the programs costs being stated as
operating costs, which would lead to overstated expenses; therefore, understating
earnings and emphasizing a conservative accounting approach (not to industry
standard).
Since estimates and formed assumptions are at the manager’s discretion the
level of uncertainty increases over time (Colgate-Palmolive 10-K). This discretion leaves
room for error as nothing is guaranteed until transactions are finalized. When managers
make these estimates they take into account the accounting policies that most affect
the firm’s condition and in Colgate’s position, they inform the investor about its
significant policies relating to the shipping & handling costs. Unlike other firms in the
industry, Colgate records shipping and handling costs as a percentage of selling,
general and administrative expenses instead of a cost of sale. By doing so, the gross
profit margin is higher as oppose to lower when accounted for in the cost of sales as
shown in the following table.
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Including these costs as a percentage of selling, general and administrative
expenses highlights the firm as more profitable, which depicts a positive return for
interested investors. In addition, factoring in these costs as a percentage of cost of
sales would not affect reported earnings because they have already been accounted
for. Therefore, the aggressive accounting strategy yields higher reported earnings.
When considering disclosure at a quantitative level, Colgate-Palmolive does not
disclose numbers that are material in nature with respect to total assets or total current
liabilities. Thus, Colgate discloses numbers at a low level and further distorts its
financial statements. For instance, they state (per balance sheet) that goodwill accounts
for $2,081.8 million in 2006 and $1845.7 million in 2005, which is a material amount in
respect to total assets of $9,138.0 and $8,507.1 million in years 2006 and 2005
respectively. Furthermore, Colgate also assigns a material amount of liabilities to the
liability account labeled “other accruals,” but does not disclose in any way, shape, or
form what these “other accruals” are in their 10-K report. For example, on their 2006
balance sheet, the firm lists that $1,317.1 million in 2006 and $1,123.2 million in 2005
make up the “other accruals” account. In regards to total current liabilities of $3,469.1
million and $2,743.0 million in years 2006 & 2005 respectively, “other accruals” consists
of 38 % and 41% of total current liabilities in 2006 and 2005 accordingly. In addition,
“other liabilities” also affect total liabilities in a rather large way as this account
contributes 16% in 2006 & 13% in 2005 of the total number. These figures represent a
large amount of undisclosed liabilities that the firm does not bother mentioning
Year Gross Profit Margin (S & H
Costs as Selling, General &
Administrative Expenses
Gross Profit Margin (S & H
Costs as Cost of Sales)
2004 55.2% 48.5%
2005 54.4% 46.9%
2006 54.8 % 47.1 %
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anywhere within in the 10-K. This undisclosed information affects the firm and investors
have no insight to what theses liabilities are; thus, creating a low level of disclosure.
Overall, Colgate discloses quantitative information at a high level, but fails to do
so quantitatively. Although information in reference to “other accruals” and “other
liabilities” are not disclosed, the firm is still considered as a high level disclose firm and
takes an aggressive approach in determining its accounting policies. In order to
compete in this industry, firms have to take into account the underlying cost leadership
principle; thus supporting an aggressive approach in decision-making. Finally, Colgate
expresses its true performance within the boundaries of flexibility, and GAAP, but still
leaves an area in question when it comes to numbers, which could promote a problem
in the future.
Qualitative Analysis of Disclosure
Colgate does a fairly good job of disclosing the value of their firm and the
practices they perform. Qualitative Disclosure is the amount of information a company
discloses in their 10-K report. This information comes from the financial statements
and the Management Discussion and Analysis section (MD&A). The MD&A section of
the annual report “provides an opportunity to help analysts understand the reasons
behind a firms performance changes” (Business Analysis and Valuation). The amount
and quality of disclosure “can make it more or less easy for an analyst to assess the
firm’s accounting quality and to use its financial statements to understand business
reality.” A higher level of disclosure gives an analyst more confidence to invest in a
company because more information is available to analyze. When there is a lower level
of disclosure analyst are less likely to invest and lose confidence in the company.
Colgate-Palmolive does a fairly good job in disclosing their information whether it has
positive or negative effects on the company. Colgate discloses information regarding
research and development, distribution, raw materials, competition and trademarks.
Colgate’s 10-K explains that “strong research and development capabilities and alliances
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enable Colgate to support its many brands with technologically sophisticated products
to meet consumers’ oral, personal and home care and pet nutrition needs.” It is also
disclosed that no single customer accounts for 10% or more of the company’s sales and
our company’s products are generally marketed by a direct sales force at each
individual operating subsidiary or business unit. (Colgate’s 2006 10-K)
There are some areas of concern regarding Colgate’s 10-K disclosure of Goodwill and
Other liabilities. Goodwill consists of about 23% of our company’s total assets and that
number is increasing by about one or two percent each year. Although Colgate
purchased Tom of Maine Inc. in 2006, goodwill should not be increasing the year after.
An increase in goodwill will effectively decrease the value of our company and will
potentially raise red flags. Other liabilities consists of about 15% of our company’s total
liabilities and disclosure of these other liabilities in the 10-K cannot be found anywhere.
This raises a red flag and a huge question of where these other liabilities are coming
from.
Colgate also discloses the risks they face associated with significant international
operations. According to Colgate’s 10-K, significant competition in our industry could
adversely affect our growth and profitability if we are unable to compete effectively.
Information regarding our pension benefit plan and property leases seems to be
somewhat limited and is a minimal percentage of our company, but compared to other
firms in the industry our level of disclosure seems to be above-average.
Quantitative Analysis of Disclosure
The depth and quality of a firm’s disclosure can easily show or not show how
well a company is doing financially. Diagnostics ran by an analysts can let an investor
know if the company is manipulating the numbers to make them look better off than
they really are. For example the firm can disclose physical indexes that show over time
how the firm is operating and to what extent they are bringing in cash flows, assets and
if they’re being overstated and then if they are burying the liabilities and expenses.
Then with this information an investor should be able to compare over a cross-section
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of the same information but with other firms in that same industry. The cross-sectional
diagnostic will show whether or not the manipulation is just within a firm or if it is a
common discrepancy throughout an industry. When looking at the statistics or a graph
of internal comparison analyst will be able to tell within a year time span the extent, if
any, of the manipulation.
Core Sales Manipulation Diagnostic
The Core Sales Diagnostic is a set of tools we used to help us get a better look at our
companies sales compared to the other company’s sales in the industry. We took the
net sales and divided them by the cash from sales, accounts receivable, and inventory
for Colgate-Palmolive, Proctor & Gamble, Clorox Company, and Church & Dwight.
These ratios were computed for the previous 5 years to give us an insight to our
company along with our main competitors in the industry. After computing Colgate-
Palmolive and their main competitor’s ratios we are now able to compare Colgate’s
sales to other companies and look for any trends, discrepancies, or errors that might
lead to potential red flags.
Net Sales/Cash from Sales
(Numbers are from Morningstar.com and Colgate’s 10-k)
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The net sales to cash from sales ratio gives us an idea of how much cash is
collected from sales in a given period. The desired ratio should be close to 1, meaning
that the amount of sales in a period should be very close, if not equal, to the amount of
cash we are expecting to receive in that given period. The graph above displays the
trend that each firm in the industry has a ratio close to 1 for the previous 5 years (with
the exception of Proctor & Gamble in 2006 and 2007). An increase in Proctor &
Gamble’s (PG) ratio might be a result from a huge increase in sales. In 2005, PG
experienced about an 800 million dollar decrease in free cash flow, but in 2006 that
number increased about 2.167B. Between 2005 and 2006, Colgate’s ratio increased by
about .02. This increase is probably a result of Colgate’s purchase of Tom’s of Maine,
Inc., which noticeably increased our sales. After analyzing the graph, Colgate-
Palmolive’s ratio remains close to 1 throughout the previous 5 years and therefore we
have found no signs of any accounting errors or distortions that would lead to any
potential read flags.
Net Sales/Net Accounts Relievable
(Morningstar.com and Colgate’s 10-K
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The net sales to accounts receivable ratio displays how much of our net sales are
credit transaction. A low ratio indicates that fewer sales are on credit. The graph
above shows that Colgate has the fewest amounts of credit transactions. Colgate’s
growth has been increasing more and more each year. Due to this they are now going
to be able to increase their cash flows which will result in them being able to use less
credit transactions and invest their own “cash” without having to pay back as much
interest as would have if were using creditors. The companies in this industry all have
about the same ratio, but Proctor & Gamble’s ratio is noticeably higher. The reason
they have a higher number is because they have a greater number of net sales than
any other firm and therefore will inevitably have more credit transactions. Proctor &
Gamble’s drop from about 13.5 to 9 in 2006 indicates that they had a huge increase in
receivables or an increase in net sales. In 2006 their net sales increased by about 12B
and their accounts receivable only increased by 1.6M. The graph displays that the firms
in this industry follow the same trend. As we look at the ratios we can see that there
have not been any significant changes for our firm, and therefore we have concluded
that Colgate-Palmolive has not deceived the value of their company through changes in
their net sales or accounts receivable.
Net Sales/Inventory
0
2
4
6
8
10
12
14
16
18
2003 2004 2005 2006 2007
Colgate
Clorox
Proctor & Gamble
Church & Dwight
(Morningstar.com and Colgate’s 10-K)
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The net sales to inventory ratio displays the amount of inventory relative to net
sales. The ratio can decrease due to an increase in inventory or a decrease in net
sales, and vice versa. This can also be affected by warranties and unearned revenues.
Compared to the other firms, Colgate’s ratio follows closely with the trend. In 2006,
Clorox experienced a decrease in their inventory by about 30 million and that cause
their ratio to drastically increase. This should raise a red flag for Clorox. The graph
above displays that the industry trend for net sales to inventory ratio is decreasing.
After looking at the inventory for each company, it is clear that the level of inventory is
increasing each year. Increase in outstanding warranties have caused Colgate-s ratio to
decrease in the past few years. Colgate needs to find ways to better keep their sales to
inventory more stable because this could cause show later on manipulation in outher
accounts. Colgate- Palmolive had some small increases and decreases in their inventory
throughout the past 5 years, but there is no concern about manipulation since Colgate
follows the trend of the industry.
Conclusion
The quantitative quality of disclosure assessed by the sales manipulation diagnostic
shows that Colgate-Palmolive has not attempted to deceive the overall value of their
company. These graphs above display how Colgate is performing in comparison with
other companies in the industry. Colgate tends to follow the trend of the industry and
there were no areas found where manipulation or major distortions would occur.
Expense Manipulation Diagnostics
Investigating expense diagnostic ratios for a firm allows us to see if management is
hiding some expenses, in order to look better on the books. By analyzing the last five
years we can compare Colgate-Palmolive expense ratios to trends from other
competitors in the industry. If these ratio diagnostics show any abnormality from
industry-wide trends we can assume there is a potential “Red Flag”. The following
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section will examine these expense diagnostic ratios and see if Colgate-Palmolive is
reporting realistic accounting information.
Asset Turnover (Sales/Assets)
(Morningstar.com and Colgate’s 10-K)
Asset Turnover is a firm’s net sales / total assets. Firms invest a lot of resources
into their assets, so it is crucial for a firm to use those assets as efficiently as possible.
If you see an abrupt change in this ratio there’s a good chance there has been some
manipulation, because it is difficult to drastically change your asset productivity. So a
large change in this ratio could indicate a large write-off of assets or over/under stating
assets.
Colgate-Palmolive has a stable asset turnover ratio trend line that has fluctuated
between 1.2-1.35, which indicates there probably hasn’t been any manipulation. In
2007 there was a small declining in the asset turnover ratio. This is probably a result
from the restructuring program started in 2004. This should only be of little concern for
investors because Colgate stated “Savings are projected to be in the range of $325 and
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$400 ($250 and $300 after-tax) annually by 2008.”(Colgate-Palmolive 10-K) So the
asset turnover ratio should have a steady increase after the restructuring program is
completed.
Changes in Operating Cash Flows / Operating Income
(Morningstar.com)
By comparing operating cash flows to operating income this will shows us how
much operating income is supported by cash operations. This ratio should be as close
to 1:1 as possible to demonstrate that cash flows from operations match well with
operating income. If the number of the ratio is small this indicates that the majority of a
firm’s cash flows were created from its operating activities and not it’s investing or
financing activities. Colgate-Palmolive has maintained a low and stable operating cash
flows / operating income ratio over the past five years. The analysis of this ratio doesn’t
show any evidence of manipulation, and that Colgate-Palmolive’s cash provided from
operations is supported by operating income, which indicates a strong company.
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Change in Cash Flows from Operating Activities / Net Operating Assets
(Morningstar.com)
The ratio of changes in CFFO/NOA uses cash flows from operations to show
firm’s return on operating assets. It also determines if a firm is utilizing its fixed assets
constructively. A high ratio is preferred and indicates that a firm is utilizing its assets to
create cash flow. Colgate-Palmolive has the highest ratio in this industry, and has
sustained this ratio for the past five years. This shows that Colgate-Palmolive has kept
the same accounting mechanisms for recording these activities and reliably conveys this
information to the investor. This analysis does not raise any “Red Flag’s”
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Total Accruals / Change in Sales
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
0.8
1
1.2
2003 2004 2005 2006 2007
Colgate-Palmolive
Church & Dwight
Clorox
(Morningstar.com)
“The accrual basis accounting records revenues when they are earned and
realized, and expenses when they are incurred.” (investorwords.com) Accruals includes
estimations, so this could possibly be an area managers could manipulate to make the
company look better. We have to challenge this ratio to make sure Colgate-Palmolive is
consistent with industry trends. Total accruals are the difference between earnings and
cash flows from operations. Colgate-Palmolive has a low ratio meaning that the
majority of their sales are purchased with cash. This is better for a company because
there is a smaller likelihood for defaults on credit transactions. A company that has a
low ratio is more favorable because more sales are purchased with cash than through
credit Colgate-Palmolive’s ratio also had been stable over the last five years, but as one
can see from the graph above Colgate’s ratio has greatly increased from 2006 to 2007
by nearly 80%. Although their ratio is still low it is above their average for them which
could lead to accounting distortions.
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Pension Expense/SG&A Expenses
The pension expense / SG&A expense ratio informs investors how much of a
firm’s pension plan accounts for its’ selling, general and administrative expense. This
ratio should be low because a firm doesn’t want to have a large portion of expenses
going to retired workers. Resources that are given to retired workers will not help
increase the profitability of a firm, so firms should maintain a low ratio. Colgate-
Palmolive has maintained a stable ratio over the past five years ranging from 4.6% -
3.8%. This indicates that Colgate-Palmolive is not misusing its resources in the pension
program. The steady trend over the five years also demonstrates that Colgate-Palmolive
has not manipulated any of the pension expenses. If there was a sharp jump in the
graph then there would be a potential “Red Flag”.
Conclusion
The expense diagnostic ratio analysis shows that Colgate-Palmolive has not
manipulated its financial statements to make the company appear stronger. The asset
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turnover ratio’s consistency showed Colgate-Palmolive sales are supported by the firms’
assets. So their accounting policies have been properly depreciating and writing off
assets to accurately portray asset at their true market value. The operating cash flows
/ operating income ratio illustrates that Colgate-Palmolive’s cash provided from
operations is adequately supported by its’ operating income, and has sustained a
consistent ratio for the past five years. The cash flow from operation / net operating
assets ratio explains that Colgate-Palmolive is utilizing its operating assets more
efficiently than competing firms. All the information from these graphs illustrates the
consistency in their accounting policies. The information follows closely with other
trends set by competitors in this industry. Therefore from this analysis there has not
been any manipulation in any of these areas of Colgate-Palmolive’s accounting policies.
Identifying Potential “Red Flags”
An analysis of the diagnostic ratios for Colgate-Palmolive should reveal any
manipulation or distortions that may arise in the financial statements. In the analysis of
the ratios and disclosure for Colgate, very few red flags have been discovered, but
there are some areas that need to be discussed.
There were small increases and decreases throughout the graphs, but in respect to the
industry, they follow the trend quite well. As explained earlier, the only areas of
concern deal with goodwill and other liabilities. Other liabilities on the balance sheet
take up a noticeable percentage, about 15%, of our total liabilities, but have not been
mentioned throughout the 10-K report. Colgate’s failure to disclose this information
could lead to a decrease in value of their company. Goodwill has increased from
$1,846 million in 2005 to $2,082 million in 2006. This increase in goodwill has
continuously left an overstated asset on the balance sheet that takes away from the
value of this company. In conclusion, we have decided that Colgate’s goodwill has
been overstated for the previous five years.
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Undo Accounting Distortions
Finally, in order to evaluate a firm’s “true economic performance” accounting
distortions have to be restated so the “real” numbers of the firm can be evaluated. In
Colgate-Palmolive’s case, goodwill has been a constant growing intangible asset that
leads to overstating total assets. For instance just since the 2004 Restructuring Program
there has been a $782 million increase in Goodwill. Thus, impairment of goodwill is
required to present the actual numbers at current value. Since Colgate overstates
goodwill, we must take the ending goodwill balance at the end of 2002, $1182.8
million, and amortize it over the next five years. Furthermore, the Goodwill in the
following years also has to be amortized over a related five year period. Colgate’s 2007
10-K shows an ending balance of Goodwill in 2007 of $2,272 million. In comparison, the
impaired GW ending balance of $393.88 million is a significant decrease and is left to be
appropriated over the 2008 – 2011 time period. Lowering GW by the respected amount
increases both Total Assets and Total Stockholder’s Equity over the appropriate
amortization life.
Goodwill as a Percentage of Total Assets - Before Restatement 2002 2003 2004 2005 2006 2007 Colgate 16.7% 17.4% 21.8% 21.7% 22.8% 22.5% Goodwill as a Percentage of Total Assets - After Restatement 2002 2003 2004 2005 2006 2007 Colgate 12.9% 10.1% 10.7% 6.2% 3.9% 3.3%
In addition, the declining GW balance coexists with a decreasing percentage
representation of Total Assets as seen in the above tables. Over the six-year period,
GW declines from a 12.9% representation of Total Assets to a significantly less 3.3%
model.
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Consequently, impairing Goodwill when it is a material amount of assets is
needed in order to evaluate the underlying value of the firm. In Colgate’s case, GW
represented a large portion, higher than 20%, of its related Total Assets. Therefore,
impairment was required.
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Ratio Analysis, Forecast Financials, and Cost of
Capital Estimation
Financial Analysis
Ratio analysis and cash flow analysis are the two main tools used to analyze the
financial performance of a company. The ratio analysis is made up of three types of
ratios that measure a firm in different ways. These three measurements are liquidity,
profitability, and capital structure. By using these ratios an analyst can compare the
firms past performance with its present, and also against other firms’ performance.
These can also provide enough information for forecasting future performance. By
looking at the financial statements of a firm and their peers we will be able to better
understand where the firm stands in their industry. Also these ratios and cash flow
analysis gives an investor a better understanding of how the firm uses and disposes of
their finances. “The goal of financial analysis is to assess the performance of a firm in
the context of its stated goals and strategy.” (Business Analysis and Valuation)
Liquidity Analysis
The ratios for liquidity analysis assess the firm’s ability to repay their short term
and current liabilities. Ratios such as inventory turnover, receivables turnover, and
working capital show how efficient the firms operates. The greater these ratios are the
more efficient the company is with their operations. The current ratios and quick ratios
are key indexes of a firm’s short term liquidity.( Business Analysis and Valuation) If the
quick asset ratio is greater than one it indicates that a firm has enough cash from its
assets to cover all of its current liabilities.
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Current Ratio
Current ratio is found by dividing a firm’s current assets by their current
liabilities. This ratio shows the ability of a firm to be able to cover their liabilities; their
short term liquidity. Most covenants require under most circumstances for a firm to hold
a current ratio of 1 or greater. Lenders must look at the company’s financial statements
first though because the ratio can have distortions in it. For example, while Church &
Dwight have had on average a higher current ratio they have also had an increase in
sales over the past few years, but their profit margins a operating profit margins are the
lowest in their industry. This distortion can be created by the firm holding assets that
may be hard to liquidate. Colgate-Palmolive’s average current ratio since 2003 has been
1.02. Last year there was a 14% increase in Colgate’s current ratio. This increase was
due to their “worldwide net sales in 2007, going up 12.5% from 2006 driven by volume
growth of 6.5%, net selling price increases of 1.0% and a positive foreign exchange
impact of 5.0%.” (10-K 2007) Colgate’s increase in profits and ability to maintain an
average of at least a 1 for their current ratio should help them keep lenders financially
supporting them when needed. In their 2007 10-K Colgate states that the Company
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expects cash flow from operations and existing credit facilities will be sufficient to meet
foreseeable business operating and recurring cash needs (including dividends, capital
expenditures, planned stock repurchases and restructuring payments). The Company’s
strong cash-generating capability and financial condition also allow it broad access to
financial markets worldwide.
Quick Ratio
The quick asset ratio is very similar to the current ratio except for that it helps cover the
problem of assets that may not be as liquid. It assumes that the firms accounts
receivable are liquid. (Business Analysis & Valuation) To figure the quick asset ratio we
take the firm’s cash, short-term investments, and accounts receivable and divide by the
current liabilities. From 2003 to 2007 Colgate-Palmolive’s average quick ratio has been
.61 which is right along the same average with their competitors. Church & Dwight
have the leading ratio with it being at an average of .8. This is due to their sales having
an increase of 33% in just the last quarter. Most of the firms in this industry though,
including Colgate-Palmolive are all still ahead of them in sales and gross and operating
profit margin.
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A/R Turnover
Accounts receivable turnover is figured by dividing the firm’s sales by accounts
receivable. This is just one of the ratios that help show how efficiently a company is
utilizing its working capital. A high or increasing accounts receivable turnover is
usually a positive sign - showing the company is successfully executing its credit policies
and quickly turning its Accounts Receivables into cash. A possible negative aspect to an
increasing Accounts Receivable Turnover is the company may be too strict in its credit
policies and missing out on potential sales. (spireframe.com) Colgate-Palmolive has the
lowest turnover amongst its competitors with an average since 2003 of 8 and has been
decreasing since 2005. This means that they are collecting cash slower than their
competitors and have less cash on hand. They state in their 2007 10-K that higher
balances in accounts receivable were due primarily to higher net sales in 2007. The
main competitor in the industry, Proctor & Gamble, has a significantly higher turnover
than Colgate with an average of 14. This indicates that they may have a firmer grasp
on their credit and collection policies than their competitors. In this industry though
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accounts receivable only accounts for about a tenth of total assets and may not be a
good indicator for creditors to look at.
Days Sales Outstanding
Days Sales Outstanding shows the amount of days on average it takes for a firm
to collect their accounts receivable. The lower the number the better because it shows
how quickly a firm collects cash and can then reinvest. It can give insight into the
changes that occur within an organization's receivable balance; indicating whether a
change occurred because of a positive or negative fluctuation in sales during that
period. (credit-to-cash-advisor.com) The days sales outstanding correlates with the
above accounts receivable turnover inversely. A firm wants for their turnover to be
higher and days outstanding to be lower. The average days outstanding for this
industry are approximately 36 days. It takes Colgate on average, since 2003, 45 days to
collect their receivables compared to 27 days by their main competitor, Procter &
Gamble. Colgate has the lowest turnover and the highest days outstanding. This shows
that it takes them a longer time to collect the cash from their accounts receivable, and
leads them to have less cash on hand to turn around and reinvest. However, in
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Colgate’s 2007 10-K their statements show that days sales outstanding decreased
slightly as compared to 2006.
Inventory Turnover
Inventory turnover is figured by taking a firm’s cost of goods sold and dividing by
their inventory. It is an indicator on how efficient a company sells and replaces their
inventory. The higher the number, the more efficiently the firm is operating because
they have less money tied into inventory. Colgate-Palmolive’s average inventory
turnover rate since 2003 is 5.58 in an industry where the average turnover rate is 6.75.
Clorox has been the leader for the past 4 years in inventory turnover by far with an
average of approximately 8.5. Most of the inventory in this industry has a definite but
prolonged shelf life and do not turnover as quickly. This can, at times, make the
personal goods industry rate be lower than other industry’s turnover rate. Those firms
that can generate a given level of profit with a lower level of investment in inventory
will generate higher cash flows and better return on invested capital. (SupplyChain
Digest) Overall this turnover ratio has no real trend to it. In some years, the inventory
will be higher at the end of the year than other years. Since inventory is kept on a
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demand basis, these levels can fluctuate from year to year causing the inventory
turnover to increase or decrease.
Inventory Days
Days in inventory is figured by taking a full calendar year and dividing by the
inventory turnover. It explains how long it takes inventory to turnover into sales
(Investopedia). Just like the relationship with accounts receivable turnover and days
outstanding, it too usually has an inverse relationship with inventory turnover. It is
important for a firm to try to keep their inventory low because, working capital tied up
in inventory can’t be used for more productive purposes that could generate higher
returns or growth for the company. (SupplyChain Digest) The companies that have a
higher turnover have the lower days in inventory. Colgate’s days supply of inventory on
average is 62 days. The inventory days coverage ratio increased to 73 in 2007 as
compared to 69 in 2006 to ensure continued product supply during plant closings under
the 2004 Restructuring Program. (2007 10-K) According to SupplyChain Digest the
average days in inventory have increased by about 2% across all the industries in the
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past year. This could be an indication of how the economy was slowing down and
consumers having less incentive to spend money.
Working Capital Turnover
2003 2004 2005 2006 2007
Clorox -72.47 -18.49 -17.01 -37.75 -12.21
Colgate 193.79 1150.43 808.29 -728.45 83.48
Proctor & Gamble 15.15 -10.216 -12.05 15.7 -11.224
Church & Dwight 18.51 10.73 20.5 17.42 8.945
Working capital turnover is the difference between a firm’s current assets and
current liabilities divided by sales. This shows an investor how well/efficient a firm runs
its operations in relation to its accounts receivable, inventory, and accounts payable. In
simple terms, it’s how much sales are produced from a firm’s working capital. The
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average working capital turnover in this industry is between -20 and 20 while Colgate-
Palmolive ranges from 1200 to -750. This graph shows that Colgate-Palmolive was
nowhere near the norm for its industry until 2007. According to Colgate’s prior 10-K’s
the reason for the high volatility in their working capital is due to the sudden changes
brought with the 2004 Restructuring Program. “When a firm has a significantly high
working capital turnover they are at a credit risk. Often it buys in large amounts and
pays its bills promptly. But it has no reserve funds to serve as a cushion against hard
times.” (WSJ) The Company’s working capital as a percentage of net sales improved to
2.2% in 2007 as compared with 2.3% in 2006. The Company’s working capital changes
were driven by higher levels of payables and accruals, primarily due to the timing of tax
payments and higher advertising, offset by higher accounts receivable and inventory
balances. (2007 10-K) Overall we see a dramatic decline in our working capital turnover
from 2004 to 2006. This was because of the new program Colgate implemented in that
year along with increases various expenses. However, in 2007; it went back to the level
with its competitors.
Conclusion
After looking at Colgate-Palmolive’s ratios and comparing them with their
competitors, it is fair to say that they are, on average, a liquid company. This is due to
their most recent sales and profits being for the most part very positive. Their working
capital was, for a while, very off from its competitors but has since increased to the
norm. Their current and quick asset ratio is around 1 which is average when viewed
upon by covenants. Days’ supply of inventory has been increasing over the past view
years which means their inventory is remaining on shelves longer before being sold. We
can see that in our inventory turnover is getting smaller in the respective years,
resulting in a larger days supply of inventory. After looking at all the liquidity ratios and
comparing them to the industry, we will conclude that Colgate Palmolive’s liquidity is
average.
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Profitability Analysis
The profitability analysis shows their ability and effectiveness to turn profits. In
this analysis, all of the ratios have a common denominator of sales. In effect, we can
ultimately say that the biggest driver of profits is a company’s sales. The six ways in
which we measure the profitability of a company comes from the asset turnover, return
on equity, return on assets, operating profit margin, gross profit margin, and net profit
margin. These ratios help us show an investor how well managers use the funds
invested by shareholders, how well the company generates money from their assets,
and their financial leverage.
Gross Profit Margin
Gross profit margin measures the percent of total sales revenue that the firm
retains after subtracting the cost of goods sold. It shows how much revenue is left over
after accounting for the cost of goods. It is a basic indication of how financially healthy
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a company is. It is calculated by taking the revenue minus cost of goods sold divided by
revenue. An increase in the ratio represents a decrease in cost of goods sold relative to
the revenue. Here, firms want a higher gross profit margin ratio. From 2006 to 2007,
gross profit margin rose from 54.8 percent to 56.2 percent, respectively. In 2007, their
gross profit benefited from a continued focus on cost-savings programs, lower charges
related to the 2004 Restructuring Program and the shift toward higher margin products(
2007 10-K). This offset such costs as materials and shipping and packaging. The
decrease from 2004 to 2005 was due to the high costs associated with the ongoing
2004 Restructuring Program. Colgate has steadily remained at the top of the industry
for gross profit margin, with their fiercest competitor, Proctor and Gamble, right behind
them.
Net Profit Margin
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Net profit margin is the firm’s net income divided by sales. This ratio is different from
the gross profit margin because it takes into account all the firms expenses to get the
net income versus jus subtracting out the cost of goods sold. Here, a high ratio is
preferred which will show a high net income relative to the firm’s sales. Colgate did not
have the same results here as they did with their gross profit margin, compared to their
other three competitors. As shown, they would continually increase one year, and
decrease the next. They stayed right around 12-15 percent for all 5 years. Church and
Dwight continued to underperform their competitors as they also did with the gross
profit margin. Clorox jumped from 13.2 percent in 2004 to 24.98% in 2005, which
substantially outperformed the market in 2005.
Operating Profit Margin
The operating profit margin is the operating income as a percent of the firms
sales. This calculation is important to the firm since it is an indication of how well a firm
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can pay off things such as operating expenses and interest on their debt. It also shows
how much profit is made (from the operations part of a company) on each dollar of
sales. It is calculated by taking the firms operating income divided by the sales. A high
rate is desired to show that their income from operations is performing as it should,
relative to the sales. The current industry leader in operating profit is Proctor and
Gamble. They currently have a 20.59 percent margin. However, in 2003 Colgate was at
the top. Their sudden decrease in 2004 was due to a 2 percent decrease in operating
income while having a 6.55 percent increase in their sales. This led to the big dip in
their operating profit margin. This decline once again relates to their 2004 restructuring
program. Their operating income was quite low from 2003 to 2004 and we can see this
margin to start to level out at the end of 2007. Church and Dwight have been steadily
increasing their profit margin by have more of an increase in net cash from operations
in relation to the percentage increases in sales. In 2003, operating income was 10.6%
of sales while in 2007; it was up to 13.7% of sales. So we are seeing an upward trend
in Church and Dwight’s operating profit margin. Proctor and Gamble has stayed quite
constant throughout all five years.
Asset Turnover
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Asset turnover is calculated by divided the sales in one year by the total assets in
the previous year. This ratio tells managers and investors how well the firm is utilizing
its assets to generate sales. A higher ratio would be preferred in this situation because
it would be producing more revenue for every dollar spent on assets. Generally,
increasing the sales would increase the turnover. However, if the assets from the
previous year increase at a higher rate, this would cause the asset turnover to decline.
Colgate was on average, the top of its industry in asset turnover for all 5 years. They
had an average of a 1.29 turnover which means that for every $1 of assets produced
$1.29 of sales. Although from 2006 to 2007, Colgate’s sales increased, their assets rose
at a higher rate in 2006, causing the turnover to decline.
Return on Assets (ROA)
Return on assets shows the return that a firm in receiving from their assets. It is
calculated by dividing net income by the total assets. This is a very important number
for a firm for two reasons. First, the firm can see what return they are making on their
assets that they currently have. If it’s not a sufficient return, they might decide to
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terminate it. More importantly, they use this number for new projects. It is very helpful
to use this ratio to observe what this new asset might add to their return. If the return
on assets rate is above the rate of borrowing, they should accept the new asset.
Colgate’s trend for their return on assets remains very steady, staying right around 17
percent. Their actual 5 year average was 17.16 percent which was the industry leader,
with Clorox a close second. Clorox had a substantial increase, however; from 2004 to
2005 which put them at the top of the industry during these years. This was due to
them doubling their net income which significantly increased their ROA.
Return on Equity (ROE)
Return on equity is the measurement of how profitable a firm is with the funds
that have been invested by investors. It is calculated by dividing the net income by the
shareholders equity. Companies might also choose to do find the change in ROE. To
calculate this you would divide the beginning of the year shareholders equity by the end
of the year shareholders equity. This will show investors the change in profitability of
the firm in that year. In 2004, Colgate took a huge dip on their ROE due to 2004
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Restructuring Program. They spent a lot of internal funds, and incurred a lot of initial
charges which reduced the net income dramatically. Colgate again outperformed their
competitors staying right around 1 from 2005 to 2007.
Conclusion
After collecting all the data for the profit side of the company, we can come to a
conclusion on how well Colgate performed with respect to their competitors in the
industry. Colgate has outperformed the industry in their return on equity, return on
assets, and asset turnover. They stayed fairly competitive in the areas of net profit
margin and operating profit margin. We can tell that in 2003, they outperformed the
industry in these two areas; however the 2004 restructuring program a direct effect on
both of these profit margins.
Capital Structure Analysis
Capital structure is the way in which a firm is financed, whether it is through
debt or equity. Usually we refer to the debt-to-equity ratio when we talk about the
capital structure of a business. Usually a firm doesn’t finance their company solely on
one or the other. It comes from a combination of the two. In this section we will show
ratios that include: Debt-to-equity, times interest earned, debt service margin and also
the internal and sustainable growth rates.
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Times interest Earned (TIE)
Times interest earned is the calculation of the ability of a firm to meet their debt
obligations. This ratio is stated before taxes and usually tells us how many times the
company can cover the interest charges. It is calculated by dividing the earnings before
interest and taxes by the interest expense. A higher ratio will show that the firm has
more ability to pay off the interest on debt. After analyzing this graph, Colgate has
always remained above the industry average. Their earnings compared to the interest
expense they pay on debt shows that they outperform the industry by having more
ability of paying off these interest charges. Since this ratio includes their earnings
before interest and taxes and also their interest expense, either one of these could have
hindered the ratio in a negative or positive way.
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Debt Service Margin
This ratio measures the adequacy of cash provided by operations to cover
required annual installment payments on the principal amount of long-term liabilities
(Financial Analysis Notes). This is calculated by taking the cash flow from operations in
one year by the current portion of long-term debt in the previous year. Like the times
interest earned, the firm desires a higher ratio to allow them to pay off this debt.
Colgate’s debt service margin stays relatively consistent, remaining around 4-5 from
2003-2006. However in 2007, it dropped to 2.84, which shows that its ability to pay off
2003 2004 2005 2006 2007
Clorox 9.94 6.126 7.513
Colgate 5.92 5.58 3.95 5.11 2.84
Proctor & Gamble 14.1 8.56 5.71 4.36 6.96
Church & Dwight 4.19 55.91 32.79 11.86 6.52
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the current portion of long term liabilities. This means that for every $2.84 that was
generated from the cash from operations, $1 of this was used to pay the long term
debt that will mature within the next year. This drop is not positive because creates
more pressure to pay off debt using other cash flows. Compared to other firms in the
industry, they remained fairly competitive except for Church and Dwight, who increased
dramatically in 2004 and stayed at the top until 2007.
Debt-to-Equity ratio
2003 2004 2005 2006 2007
Clorox 2 1.49 -7.54 -24.18 20.44
Colgate 7.43 5.96 5.3 5.48 3.423
Proctor & Gamble 1.7 2.3 2.52 1.16 1.07
Church & Dwight 1.55 2.35 1.82 1.702 1.34
Debt to equity is the measure of a firm’s leverage which is calculated by dividing
the total liabilities by the shareholders equity. It indicates whether the firm uses more
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debt or equity to finance its assets. A higher ratio generally means that a company is
financing their assets with debt. Colgate-Palmolive has been decreasing their debt-to-
equity over the past 5 years. It started out with a ratio of 7.43 and has been slowly
declining. At the end of 2007, it has a ratio of 3.42 which means that is still using more
debt than equity to finance its assets. Compared to other firms, like Proctor and Gamble
and Church and Dwight, this number is still above the average. However, the 2004
restructuring program that Colgate-Palmolive implemented is still progressing. In result,
we should continue to see a steady decline in the debt-to-equity ratio. They will
continue to use more and more funds from their earnings rather than using debt. Just
by the 10 percent increase in retained earnings of Colgate from 2006 to 2007, they are
well on their way to using less debt to finance their assets.
Conclusion
When analyzing Colgate’s capital structure, we see a steady decline in the debt
to equity which is a positive element of the firm. However, we also can see a downward
trend in the debt service margin which indicates their declining ability to pay off long
term debt. Overall though, Colgate-Palmolive is above the industry average with respect
to servicing the interest charges they incur and how they finance their company.
Internal Growth Rate and Sustainable Growth Rate Analysis
The sustainable growth rate (SGR) and the internal growth rate (IGR) shows the
maximum amount that a firm can grow. The SGR is directly affected by the ROE and
dividend payout ratio. The IGR is affected by the ROA and the debt to equity ratio.
These ratios are important because they are the drivers of these growth rates. If a firm
wants to grow more than what its SGR shows, you would imagine these ratios would
also fluctuate.
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Internal Growth Rate
2003 2004 2005 2006 2007
Clorox 8.26% 8.76% 22.35% 7.49% 8.41%
Colgate 12.87% 10.57% 8.58% 7.95% 9.43%
Proctor & Gamble 6.60% 8.57% 7.57% 8.09% 4.36%
Church & Dwight 6.93% 6.32% 5.69% 6.22% 5.45%
The internal growth rate is the “highest level of growth achievable for a business
without obtaining outside financing (www.investopedia.com).” The IGR as calculated:
IGR = ROA * (1-(Dividends/Net Income))
Colgate-Palmolive, up until recently, had a declining internal growth rate
throughout the years signifying its expenditures related to the 2004 restructuring
program and its acquisition of Tom’s of Maine (a natural soap company). These
activities signify the IGR’s declines in years 2005 and 2006 by 1.99% and .63%,
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respectively. Although it was declining, compared to the industry average Colgate’s IGR
has been fairly steady introducing its ability to internally grow compared to its
competitors. The stable IGR was due to the return on assets, which drives IGR, to be
between 1.659 and 2 ( a .341 margin) throughout the last five years. Furthermore,
Colgate-Palmolive is able to utilize its return on assets; thus, efficiently producing high
levels with their given assets compared to its competitors. Overall Colgate’s internal
growth rate has been quite steady and competitive in the industry. Their average was
9.89% which means their maximum growth without any outside financial help would be
a little less than 10%.
Sustainable Growth Rate
2003 2004 2005 2006 2007
Clorox 24.83% 21.81% -152.7% -173.6% 180.3%
Colgate 108.5% 73.61% 54.06% 51.43% 41.71%
Proctor & Gamble 17.82% 28.30% 26.65% 17.45% 9.01%
Church & Dwight 17.69% 21.19% 16.02% 16.81% 12.78%
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A company’s sustainable growth rate is the rate at which the firm grows with
having to borrow outside funds. It is calculated by taking the debt to equity ratio and
adding it to one. You then multiply it by the internal growth rate. A higher rate is
desired here for a company to grow without have to increase their financial leverage.
Colgate’s sustainable growth rate is steadily declining from 2003 to 2007. From 2003 to
2004 we see a 50 percent reduction in the sustainable growth rate which means they
have to borrow more outside funds relative to their overall growth. This again relates
back to their restructuring program in 2004. The discrepancies on our sustainable
growth rates (going from 108% in 2003 to 41.71% in 2007) are due to the distortions
of the return on assets in the internal growth rate equation along with the times
interest earned and debt to equity ratios.
Financial Statement Forecasting
Forecasting the financial statements provides an estimate of the future
performance of a firm. Before you begin to forecast future financial statements you
have to make a common size income statement and balance sheet for the past 5 years.
The information in the common sized statements comes from Colgate-Palmolive’s 2007
10-K. The common sized financial statement makes it easier to interpret the information
being analyzed, and provides a more accurate valuation of the firm. We also analyze
industry trends when we are coming up with forecasting assumptions. Over time
industries will tend to move together, which provides a valuable tool when forecasting a
firms future activities. The following sections will talk about our forecasted assumptions
for the next ten years. These assumptions came from well thought out growth rates.
Income Statement
Forecasting financial statements begins with the income statement because it is
the foundation to all our forecasting assumptions. We forecasted our income statement
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for ten years based on Colgate-Palmolive’s past 5 year sales growth and also trends
within the industry. First, we have to make a common sized income statement, which
makes it easier to analyze the past performance of the firm. The common sized income
statement takes every line item on the income statement as a percentage of total
revenues. All of the information that is going to be forecasted relies heavily on the
accuracy of our forecasted total revenues. Since we compute all our other forecasted
financial information from this rate. After we came up with a sales growth that was
consistent with Colgate-Palmolive’s past 5 years and with the industry average, we can
compute Cost of Goods Sold, Gross Profit, Operating Income, and Net Income as a
percentage of total revenue.
The average of our sales growth over the past five years has been approximately
7.4%, which is consistent with all of Colgate-Palmolive’s competitors. This has been a
stable growth rate over the past five years, so we are confident that this figure
accurately portrays Colgate-Palmolive’s future sales. The SGR has declined over the
past 3 years, by 12.35%, which is directly driven by the other capital structure ratios
such as the times interest earned and debt to equity ratio.
The next item we forecasted is cost of goods sold, which also gave us our gross
profit. Since sales less cost of goods sold equals a firm’s gross profit. We found that
Colgate-Palmolive’s cost of goods sold was 44% and gross profit was 56% of their total
sales. These figures are the firms’ historical averages over the past five years. Through
analyzing the industries profitability ratios, we can see that Colgate-Palmolive’s gross
profit margin is slightly larger than the industry average. This indicates that Colgate-
Palmolive is running its business activities more efficiently than its competitors, which
means its following its cost leadership strategy. The selling, general and administrative
expenses historical value averages 35% of total sales over the past five years. These
figures were consistent over the past five years so we believe this assumption to be
accurate. Next we forecasted net income for the next ten years. The past five years Net
Income’s growth rate fluctuated significantly. Making forecasting these figures difficult.
The restructuring program that began in 2004 is the main reason for this. So starting in
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2008 the benefits from the restructuring program will begin, causing a more stable
income. So we averaged the past couple of years and came up with net income as 14%
of total sales. This resulted in a growth rate of 1.8% in our forecasted net income over
the next ten years.
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Common Size Income Statement2003
20042005
20062007
20082009
20102011
20122013
20142015
20162017
Net Sales100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
Cost of Slaes-45.00%
-44.90%-45.60%
-45.20%-43.80%
44.00%44.00%
44.00%44.00%
44.00%44.00%
44.00%44.00%
44.00%44.00%
Gross Profit 55.00%
55.10%54.40%
5480.00%56.20%
56.00%56.00%
56.00%56.00%
56.00%56.00%
56.00%56.00%
56.00%56.00%
Selling, general and administrative expenses33.28%
34.25%34.40%
35.59%36.06%
35.00%35.00%
35.00%35.00%
35.00%35.00%
35.00%35.00%
35.00%35.00%
Other (income) expense, net-0.15%
0.85%0.61%
1.52%0.88%
Operating profit21.87%
20.05%19.44%
17.65%19.24%
19.50%20.00%
20.00%20.50%
20.50%20.50%
20.50%20.50%
20.50%20.50%
Interest expense, net 1.25%
1.13%1.19%
1.30%1.14%
Income before income taxes20.62%
18.92%18.24%
16.36%18.10%
18.00%18.00%
18.00%18.00%
18.00%18.00%
18.00%18.00%
18.00%18.00%
Provision for income taxes6.27%
6.38%6.38%
5.30%5.50%
Net Income14.35%
12.54%11.86%
11.06%12.60%
12.70%13.00%
13.50%13.60%
14.00%14.00%
14.00%14.00%
14.00%14.00%
Earnings per common share, basic0.03%
0.02%0.02%
0.02%0.02%
Earnings per common share, diluted0.02%
0.02%0.02%
0.02%0.02%
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Balance Sheet
The balance sheet for a firm summarizes its’ assets, equity and liabilities.
Forecasting the Balance sheet is more difficult than forecasting the income statement,
but can be achieved by relating the two financial statements through profitability ratios.
The asset turnover ratio is crucial to relating the income statement to the balance
sheet. For Colgate-Palmolive their asset turnover has averaged 1.33 over the past five
years. Asset turnover equals sales divided by last years’ total assets. So to get total
assets for 2008, we took our forecasted sales from 2009 and divided it by the average
asset turnover. Once we found the total assets then we can forecast the rest of the line
items on the balance sheet. We forecasted current assets as 36.8% and non-current
assets were 63.2% of total assets. These are the historical averages over the past five
years, and have been relatively stable.
Next we will forecast liabilities and Owners Equity. We are mainly focused on
accurate owners equity forecasted values because we are doing an equity valuation of
the firm. So the liabilities are not as important, and will just be a “plug in number” to
make sure the balance sheet is balanced. Over the past five years there has been a
steady growth rate in owner’s equity of 19%. This is the growth rate we used to
forecast ten years of the owners equity. Our firm pays dividends also, so we forecasted
dividends and then subtracted them from Colgate-Palmolive’s owner’s equity.
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Common Size Balance Sheet
Assets 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Current AssetsCash and cash equivalents 3.55% 3.69% 4.00% 5.36% 4.24%Receivables 16.34% 15.22% 15.39% 16.67% 16.62% 16.60% 16.60% 16.60% 16.60% 16.60% 16.60% 16.60% 16.60% 16.60% 16.60%Inventories 9.60% 9.75% 10.06% 11.04% 11.58%Other current assets 3.88% 2.94% 2.95% 3.06% 3.34% Total current assets 33.38% 31.59% 32.41% 36.12% 35.78% 36.85% 36.85% 36.85% 36.85% 36.85% 36.85% 36.85% 36.85% 36.85% 36.85%
Property, plant and equipment, net 33.99% 30.53% 29.91% 29.50% 29.82%Goodwill, net 17.37% 21.81% 21.70% 22.78% 22.47%Other intangible assets, net 7.99% 9.60% 9.21% 9.09% 8.35%Other assets 7.26% 6.47% 6.78% 2.50% 3.57%Total Non Current Assets 66.62% 68.41% 67.59% 63.88% 64.22% 63.15% 63.15% 63.15% 63.15% 63.15% 63.15% 63.15% 63.15% 63.15% 63.15% Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
Liabilities and Shareholders’ EquityCurrent LiabilitiesNotes and loans payable 1.39% 1.46% 2.02% 1.91% 1.54%Current portion of long-term debt 4.20% 4.91% 4.19% 8.50% 1.37%Accounts payable 10.08% 9.41% 10.30% 11.38% 10.55%Accrued income taxes 2.46% 1.67% 2.53% 1.77% 2.60%Other accruals 14.57% 12.28% 13.20% 14.41% 15.22% Total current liabilities 32.70% 29.74% 32.24% 37.96% 31.28% 32.50% 32.50% 32.50% 32.50% 32.50% 32.50% 32.50% 32.50% 32.50% 32.50%
Long-termLong Term Debt 35.90% 33.65% 34.30% 29.77% 31.86%Deferred i Deferred Income Taxes 6.10% 5.55% 6.52% 3.39% 2.61%Other liab Other Liabilities 13.44% 11.95% 11.06% 13.44% 11.64% Total liabilities 88.14% 80.89% 84.13% 84.56% 77.39% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00% 81.00%
Commitments and contingent liabilities
Shareholders’ EquityPreference Stock 3.92% 2.98% 2.98% 2.44% 1.95%Common stock, $1 par value(1,000,000,000 shares authorized, 732,853 9.80% 7.98% 8.62% 8.02% 7.25%Additional paid-in capital 15.06% 11.91% 12.51% 13.33% 15.01%Retained earnings 99.39% 89.56% 105.42% 105.53% 105.10% 103.00% 103.00% 103.00% 103.00% 103.00% 103.00% 103.00% 103.00% 103.00% 103.00%Accumulated other comprehensive income -24.96% -19.67% -21.21% -22.78% -16.48%
103.20% 92.77% 108.31% 106.55% 112.82%Unearned compensation -4.43% -3.35% -3.33% -2.75% -2.16%Treasury stock, at cost -86.91% -75.86% -89.11% -88.36% -88.05% Total shareholders’ equity 11.86% 13.56% 15.87% 15.44% 22.61% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% 19.00% Total liabilities and shareholder's equ 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
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Statement of Cash Flows
Forecasting statement of cash flows is the final step in forecasting the financial
statements. This is the most difficult to forecast because cash flows are very hard to
predict. The only two line items we will forecast in the statement of cash flows are the
cash flows from operations and cash flows from investing activities. To forecast cash
flows from operations we used three expense diagnostic ratios. These include CFFO /
Operating Income, CFFO / Net Sales, and CFFO Net Income. Once these are calculated
you use the one with the most structure, because it will be the most accurate
assumption for our forecasted figures. CFFO / Net Sales clearly had the most structure
of any of these ratios, so this ratio is the best for forecasting future operating cash
flows. This figure ranged between 16%-18%. So we averaged this ratio at 17% and
multiplied this value by the forecasted net sales. Next we calculated cash flows from
investing activities as the change in long term assets. This is an appropriate method
because as non-current assets increase, cash is being used to buy these items. Cash is
received whenever the firm sells these non-current assets, causing a positive cash
inflow.
Cost of Capital Estimation
It can be very difficult to estimate a company’s cost of capital. To estimate cost
of capital we need to estimate our cost of equity and our cost of debt.
Cost of Equity (Ke)
Cost of equity can be very difficult to estimate and there are different methods,
or approaches, that can be used when measuring the cost of equity. We estimated our
cost of equity using the capital asset pricing model (CAPM). This approach “expresses
the cost of equity as the sum of a required return on riskless assets plus a premium for
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beta or systematic risk” (Business Analysis & Valuation). We needed to determine a
return on riskless assets, a market premium, and a beta risk. To determine our
required return on riskless assets we used the St. Louis Federal Reserve Website to get
Treasury Bill rates and found a 3.75% rate. We estimated a market risk premium of
about 8%, although “many analysts assume that the market risk premium is around 7%
(Business Analysis).
We began this approach by finding the historical monthly stock prices of Colgate for the
past 5 years from Yahoo Finance and we also used the S & P 500 prices from Yahoo
Finance for the same dates. We then calculated the returns for each month on both
sets of prices. Using the interest rates from the St. Louis Federal Reserve Website for
the 3 month, 6 month, 2 year, 5 year, and 10 year treasuries, we were able to match
up the interest rates with the monthly stock prices and calculate our market risk
premium.
βeta
Next, we needed to determine a beta. We then ran 5 regressions for the each of
the 5 interest rates over the horizons of 24, 36, 48, 60, and 72. These regressions
gave us a beta, an adjusted r squared, a t-stat, a p-value, and from there we were able
to calculate our cost of equity. These regressions also show us how stable beta is
across the yield curve. We determined that our best adjusted R Square was .1268 and
that gave us a beta of .455 on the 3 month rate at 36 months. The adjusted R Square
of .1268 told us that only about 12.68% of Colgate’s return could be explained by the
market risk premium. The beta for Colgate Palmolive on Yahoo Finance was .46 so our
regression analysis compared very favorably. Our beta was pretty stable throughout
the horizons for the 24, 36, 48, 60, and 72 months. The biggest change we noticed
was about .2. Our 36 month horizon does the best job of explaining beta. We have
our highest explanatory power of about 12.68% at this return horizon. Even though
this return horizon gives us our best beta, our cost of equity at this point is still very
low. If you notice on the 2 year regression at the 36 month return horizon, the
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explanatory power and beta are very similar. As a result of low cost of equity, we plan
to use a different approach in estimating a new cost of equity.
Cost of Equity = Riskless rate of return + Beta risk * (Market Risk premium + Size
premium)
Ke= Rf + Beta (MRP + Size Premium)
Ke= .0375 + .455 (.08)
Ke= .0739 or 7.39%
After computing the cost of equity equation we found that our cost of equity was very
low. Our cost of equity was 7.39%. After determining such a low cost of equity, we
decided to use the “back door method” to acquire a new cost of equity. For the back
door method we took our P/B-1 (17.94) and multiplied by our growth rate (.12) which
gave us an answer of 2.1528. We then took our return on equity (.95) and added it to
2.1528 to get 3.1028. Finally, we divided 2.1528 by 3.1028 to get our new cost of
equity of 16.38%. This percentage is a more realistic number than our previous 7.39%
cost of equity.
3 Month Regression
Beta Adj r2 t-stat p-value Ke
72 0.285 0.039 1.969 0.053 0.06
60 0.354 0.029 1.660 0.102 0.066
48 0.555 0.079 2.241 0.03 0.082
36 0.455 0.127 2.467 0.019 0.074
24 0.32 0.038 1.387 0.18 0.063
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6 Month Regression
Beta Adj r2 t-stat
p-
value
Ke
72 0.285 0.039 1.97 0.053 0.057
60 0.35 0.029 1.661 0.102 0.063
48 0.555 0.079 2.243 0.03 0.079
36 0.455 0.127 2.467 0.019 0.071
24 0.319 0.038 1.383 0.18 0.060
2 Year Regression
Beta Adj r2
t-
stat
p-
value
Ke
72 0.292 0.042 2.03 0.046 0.051
60 0.371 0.033 1.728 0.089 0.057
48 0.558 0.082 2.286 0.027 0.072
36 0.444 0.124 2.44 0.020 0.063
24 0.313 0.037 1.376 0.183 0.053
5 Year Regression
Beta Adj r2 t-stat
p-
value
Ke
72 0.29 0.041 2.009 0.048 0.056
60 0.365 0.031 1.706 0.093 0.062
48 0.562 0.082 2.28 0.027 0.077
36 0.455 0.128 2.481 0.018 0.069
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24 0.318 0.037860847 1.38024 0.181377 0.05794
10 Year Regression
Beta Adj r2
t-
stat
p-
value Ke
72 0.29 0.041 2.016 0.048 0.058
60 0.366 0.032 1.711 0.092 0.064
48 0.558 0.082 2.282 0.027 0.0796
36 0.452 0.129 2.485 0.018 0.071
24 0.319 0.040 1.402 0.175 0.061
Cost of Debt (Kd)
The cost of debt is determined by the interest rate on the debt. We began by
searching through Colgate’s 10-K report to find these interest rates. According to their
10-K, the long-term interest rate on debt is 8% and the current rate is 4.20%. We
used about a 6% interest rate on the other liabilities and the deferred taxes portion of
the long-term liabilities section (St Louis). After using these interest rates and
calculating a weighted average, we determined that the weighted average cost of debt
for Colgate is estimated at 6.16%.
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Amount Weight Rate Weighted
Average
Current Liabilities
Notes and Loans Payable 155.9 1.99% 4.20% .0836
Current Portion of L.T.
Debt
138.1 1.76% 8.00% .1408
Accounts Payable 1066.8 13.63% 4.20% .5725
Accrued Income Taxes 262.7 3.36% 4.20% .1411
Other Accruals 1539.2 19.67% 4.20% .8261
Total Current
Liabilities
3162.7
40.41%
Long-Term Debt 3221.9 41.17% 8.00% 3.2936
Deferred Income Taxes 264.1 3.38% 6.00% .2028
Other Liabilities 1177.1 15.04% 6.00% .9024
Long Term Liabilities
4663.1
59.59%
Total Debt (Liabilities)
7825.8
100%
6.1629%
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Weighted Average Cost of Capital (WACC)
Our cost of debt and cost of equity estimates are now going to be used to help
calculate our weighted average cost of capital (WACC). The before tax WACC is 9.60%,
and our after tax WACC is 8.373%. For the market value of equity we used our firm’s
market cap. We used our firm’s total liabilities for the market value of liabilities. We
were able to assume our market value of assets using our liabilities and owners’ equity.
Vd $3973 millions
Ve $7826 millions
Total $11,789 millions
Ke 16.38%
Kd 6.16%
Tax rate 30%
Before Tax 9.60%
After Tax 8.373%
CAPM
Rf 3.75 Treasury rate
Market Risk Premium .08 assumed
Beta .455 Estimate from 3 month regression 36 month
horizon
Estimated Ke 16.38%
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Conclusion
After collecting data and calculating ratios on our firm and their competitors
within the industry it is apparent that Colgate-Palmolive has had an increase in profits
over the past few years. Colgate has the highest asset turnover out of all of its
competitors and has been increasing each year which shows that their sales and market
share are also growing. Due to all the data collected showing Colgate to consistently
gain market share and increase their growth they appear to be able to continue
positively at this rate.
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Valuations
Analysis of Valuations
After all the research and analysis of our firm, the industry, the key accounting
policies and the financials, we are now ready to run a valuation of Colgate-Palmolive.
This valuation will consist of running different types of models to determine whether
our firm is undervalued, fairly-valued, or overvalued. Each of these models will give us
a different share price that we will use. These valuation models include the discounted
dividends model, the discounted free cash flow model, the residual income model, the
long-run residual income model, and the abnormal earnings growth model. The rest of
this section will explain each model in more detail along with the results from each
model.
Method of Comparables
The method of comparables is a valuation model that formulates a firm’s share
price from the calculation of the industry’s average. The industry average was
calculated from Colgate-Palmolive’s top competitors. These competitors consist of
Proctor & Gamble, Clorox, and Church & Dwight. The information about Colgate’s
competitors came from yahoofinance.com. When computing the industry we excluded
any of the outliers that would skew the industry’s average. After computing the industry
average we then can calculated Colgate-Palmolive’s share price. Although this valuation
is relatively easier than other models, it is not as effective because it is rare for a firm to
operate at the industry average. However it does give investors some insight if the
share is over or under valued.
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Trailing Price to Earnings
PPS EPS Trailing P/E Industry
Average
Colgate’s Share
Price
Colgate-Palmolive 73.68 3.2 23.05
Proctor & Gamble 66.8 3.31 20.21
Clorox 59.94 3.51 17.08
Church & Dwight 56.75 2.46 23.11
20.13
64.35
The trailing price to earnings ratio is calculated by dividing the price per share by the
historical earnings per share. By adding the industry’s price to earnings ratios, excluding
Colgate-Palmolive, and dividing it by the number of competitors derives the industry
average. Then using the industry average and multiplying it by Colgate-Palmolive’s
earnings per share gives you Colgate’s new price per share of $64.35. Comparing this
share price to the market share price of $73.68, illustrates that Colgate-Palmolive is
overvalued.
Forward Price to Earnings
PPS EPS Forward P/E Industry
Average
Colgate’s Share
Price
Colgate-
Palmolive
73.68 4.28 17.21
Proctor &
Gamble
66.8 3.88 17.22
Clorox 59.94 4.08 14.68
Church &
Dwight
56.75 3.17 17.9
16.6
71.05
The forward price is calculated the same as the trailing price to earnings except
that forecasted prices are used instead of current prices. This resulted in the industry
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average falling to 16.6, which is slightly lower than Colgate’s forward P/E. So
multiplying Colgate-Palmolive’s earnings per share by the industry average gives a
share price of $71.05. This model shows that Colgate-Palmolive is fairly valued.
Price to Book Value Ratio
PPS BPS P/B Industry
Average
Colgate’s Share
Price
Colgate-
Palmolive
73.68 4.1 17.97
Proctor &
Gamble
66.8 21.72 3.08
Clorox 59.94 -3.99 NA
Church &
Dwight
56.75 16.31 3.48
3.28
13.45
The price to book ratio is computed by taking the price per share divided by the
book value per share. This ratio has little to do with the market value of a share
because it is the accounting value of a share. It does not take into account future
business performance, so it is not a very useful valuation of a share price. When
calculating the industry average we excluded Clorox because they had a negative book
value per share. We found the industry average was 3.28 and multiplied that by
Colgate’s BPS, and came up with a share price of $13.45. In this case, the model shows
Colgate-Palmolive is significantly overvalued.
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Price Earnings Growth
PPS EPS PEG Industry
Average
Colgate’s Share
Price
Colgate-
Palmolive
73.68 4.28 1.72
Proctor &
Gamble
66.8 3.88 1.62
Clorox 59.94 4.08 1.59
Church &
Dwight
56.75 3.17 1.6
1.6
54.78
The price earnings growth model, the P.E.G. ratio, calculates the firm’s stock
price by using the P/E ratio and dividing it by the expected earnings growth rate. The
industry average of 1.6 is then multiplied by Colgate-Palmolive’s estimated earnings
growth rate of 8%. Then we multiplied that by Colgate’s earnings per share and came
up with a share price of $54.78. Comparing this share price with the actual price shows
Colgate-Palmolive’s share price is overvalued.
Dividends to Price
PPS DPS D/P Industry
Average
Colgate’s Share
Price
Colgate-
Palmolive
73.68 1.6 .022
Proctor &
Gamble
66.8 1.6 .024
Clorox 59.94 1.6 .027
Church &
Dwight
56.75 .32 .01
.019
84.21
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This method is used by taking the dividends per share and dividing it by the price
per share for all of Colgate-Palmolive’s competitors to give us our D/P ratio. The D/P
ratio was found by dividing dividends per share by price per share. Then we took an
average of the industries D/P ratios to find Colgate-Palmolive’s price per share. We
divided Colgate’s dividend per share by the industry’s D/P ratio and came up with a
share price of $84.21. This model illustrate that Colgate-Palmolive actual share price is
undervalued.
Price to EBIDTA
PPS EBIDTA
(Billions)
P/EBIDTA Industry
Average
Colgate’s Share
Price
Colgate-
Palmolive
73.68 3.200 23.03
Proctor &
Gamble
66.8 19.320 3.46
Clorox 59.94 1.120 53.52
Church & Dwight 56.75 .369 153.79
28.49
91.17
EBIDTA is an acronym meaning earnings before interest, taxes, depreciation,
and amortization. By dividing current price per share by EBIDTA for all competitors, an
industry average of 24.89 was calculated. Church & Dwight was excluded from the
industry average because it is an outlier. The other two competitors P/EBIDTA ratio are
not very close to Colgate-Palmolive’s ratio either, so this model does not have very
much explanatory power. We multiplied Colgate’s EBIDTA by the industry’s P/EBIDTA
average and found Colgate-Palmolive’s share price of 91.17. This model indicates that
Colgate is significantly undervalued; however the industry average is not consistent
with Colgate-Palmolive’s ratio. So this model is unrealistic and unreliable.
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Enterprise Value to EBIDTA
EV EBIDTA
(Billions)
EV/EBIDTA Industry
Average
Colgate’s Share
Price
Colgate-
Palmolive
40.8 3.200 12.75
Proctor &
Gamble
238.02 19.320 12.32
Clorox 11.42 1.120 10.19
Church &
Dwight
4.37 .369 11.84
11.45
36.64
Enterprise Value to EBIDTA is calculated by dividing enterprise value by earnings
before interest, taxes, depreciation, and amortization. Enterprise Value was calculated
by adding the market value of equity to the book value of liabilities, and then
subtracting cash and financial investments. We computed the industry’s EV/EBIDTA
average of 11.45 and then we multiplied that by Colgate-Palmolive’s EBIDTA to get a
share price of $36.64. This model suggests that Colgate-Palmolive is overvalued.
Price to Free Cash Flow
PPS FCF/S
P/FCF Industry
Average
Colgate’s Share
Price
Colgate-
Palmolive
73.68 2.24 32.89
Proctor &
Gamble
66.8 2.25 29.69
Clorox 59.94 3.25 18.44
Church & Dwight 56.75 1.98 28.66
24.69
55.3
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The price to free cash flows is another ratio model that determines an estimated
share price. This model divides price per share by free cash flows. First, we calculated
free cash flows by adding/subtracting operating cash flows and investing cash flows
together. Then we divided that figure by the total shares outstanding to get a per share
basis. Next we calculated the industry P/FCF ratio average of 24.69, and then multiplied
that by Colgate’s FCF/S to get a share price of $55.30. This model indicates that
Colgate-Palmolive is overvalued.
Conclusion
After calculating Colgate-Palmolive’s share price using different methods of
comparables, we can conclude that Colgate is significantly overvalued. The P/FCF,
EV/EBIDTA, P.E.G., and trailing P/E models all indicate that Colgate-Palmolive is
overvalued. The D/P and P/EBIDTA models however indicated that Colgate is
undervalued. This method of comparables is not a reliable valuation method because it
assumes all firms in an industry operate the same way, which is not true. So, in order,
to accurately value Colgate-Palmolive we will rely on other valuation models to do so.
Dividend Discount Model
The Dividend Discount model gives us a way to estimate the value of a firm by
estimating the dividends we expect the firm to pay in the future. The dividends for
Colgate have been growing at a rate of about 10%. We took this growth rate and
forecasted dividends per share for the next 10 years. After forecasting dividends, we
multiplied our dividends per share by the present value, to discount each year back, to
arrive at our present value dividend for each year. Next, we calculated our terminal
value of perpetuity by taking our expected dividend per share in year 11 and dividing
that by our cost of equity minus our growth rate. Our TV of Perpetuity came out to
61.69.
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To get the present value of the terminal value of perpetuity we had to discount it
back to present year dollars. We multiplied 61.69 by the present value in year 11 to
get 11.61. We then added this value to the present value of each year to arrive at our
estimated price per share of $22.10. Finally, we multiplied our estimated share price by
1 + our growth rate, and then took it to the 3/12’s power to arrive at a time consistent
price of $22.96. This share price is with an 8% growth rate and a cost of equity of
16%. When comparing this time consistent price with our observed price of $77.41, it
is very clear that Colgate is severely overvalued. Our sensitivity analysis displays that
this model is sensitive to the inputs used. To achieve a price of $76.06, which is very
close to our observed price, we would need to increase our growth rate from 8% to
about 15%, leaving cost of equity around 16%. We would also have to decrease our
cost of capital from 16% to about 11% to get a share price close to our observed price.
Undervalued- >89.03
Fairly valued
Overvalued <65.03
Growth Rate
0.02 0.04 0.06 0.08 0.1
0.12 23.75 25.72 28.91 35.00 51.26
0.14 22.40 24.01 26.39 30.25 37.63
Ke 0.16 18.70 19.66 21.00 22.96 26.16
0.18 15.97 16.57 17.37 18.47 20.10
0.20 13.88 14.27 14.77 15.43 16.35
Discounted Free Cash Flows Model
The Discounted Free Cash Flows model uses expected future cash flows and discounts
them back to the current time period which allows for a valuation of the firm. The cash
109 | P a g e
flow model is rooted in basic theory of present value. The present value of our future
cash flows will give us an estimated price per share. Unlike other models, this free cash
flow model uses weighted average cost of capital (WACC). This model uses before tax
WACC, cash flow from operations, cash flow from investment, book value of debt, and
the growth rate of the terminal value perpetuity to estimate a price per share.
We first took our forecasted cash flows from operations and subtracted them from our
cash flows from investing activities to get our free cash flows of the firm. We then
multiplied each year by the present value of each year to get our present value year by
year free cash flows. We then added the present value of the terminal value perpetuity
to it to get the value of the firm. After that we subtracted the book value of liabilities to
get the estimated market value of equity. Once we found our estimated market value of
equity, we then divided by the number of shares outstanding to get our intrinsic price.
We then took our intrinsic price and multiplied it by 1 plus our WACC, then took it to
the 3/12’s power to get our time consistent price.
Undervalued- >89.03
Fairly valued
Overvalued <65.03
Growth
0 0.03 0.045 0.06 0.075 0.09
0.06 57.12 136.19 294.32 n/a n/a n/a
WACC
BT 0.07 37.74 84.12 149.05 408.78 n/a n/a
0.08 23.3 52.95 86.84 171.56 764.59 n/a
0.09 12.15 32.22 52.3 92.45 212.91 n/a
0.1 3.29 17.45 30.33 52.87 102.46 300.82
0.11 n/a 6.41 15.14 29.11 55.05 119.91
0.12 n/a n/a 4 13.24 28.65 59.46
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The sensitivity analysis performed above shows Colgate to be overvalued,
undervalued, or fairly valued depending on which before tax WACC and the growth rate
was applied. Our initial WACC was .06 and our growth rate was 0. This gave us a
share price of $57.12 was indicates that the value of this company is overvalued. It is
important to explain that a very small change in any of these inputs results in a very
large change in the share price. A growth rate of 6% with a before tax WACC of .06
gave us a negative number and we marked that as N/A. These large changes in price
with small input changes explain that this model is very sensitive.
Residual Income Model
The Residual Income model is one of the best valuation models used to value a
firm. This models main objective is to measure a company’s stock price. The residual
income model basically predicts the value of a firm. The sensitivity of this model is
relatively low compared to the discounted dividends model and the free cash flow
model. The residual income can either be positive or negative. A positive number adds
value and a negative number reduces the value of the firm.
This model compares the actual net income of the firm with the benchmark income of
the firm. The difference between these earnings is called the residual income. The
residual income is then multiplied by the present value factor to give us our year by
year present value of residual income. We then took the sum of those values for each
year and added them to our book value of equity and the terminal value perpetuity to
get our market value of equity. Once we estimated our market value of equity we
divided it by the number of shares outstanding to get arrive at our initial share price.
We then calculated our time consistent share price of $24.66. This share price was
estimated using a cost of equity of .17 and a growth rate of 0. With a time consistent
share price of $24.66 and an observed price of $77.41, it is clear that Colgate-Palmolive
is overvalued.
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Undervalued > 89.30
Fairly Valued
Overvalued < 65.03
GrowthRate
0 -0.1 -0.2 -0.3 -0.4 -0.5
0.09 57.17 44.4 40.43 38.5 37.36 36.61
0.11 43.86 36.89 34.42 33.16 32.39 31.87
Ke 0.13 35.12 31.22 29.68 28.68 28.34 28
0.15 29.05 26.85 25.9 25.37 25.04 24.81
0.17 24.66 23.43 22.86 22.53 22.32 22.17
0.19 21.38 20.71 20.39 20.19 20.07 19.97
0.21 18.87 18.53 18.36 18.26 18.19 18.14
The sensitivity analysis performed above shows that Colgate is overvalued at
every point in the analysis. The sensitivity of this model is very low and that can lead
to these values being significantly low. If you notice, a small change in the growth rate
does not lead to a big difference in the share price. It would take a positive growth
rate and a reasonable cost of equity to achieve a share price that is even close to the
observed share price. This model supports the conclusion that Colgate is overvalued.
Long Run ROE Residual Income Model
The Long Run ROE Residual Income model uses the book value of equity, return
on equity, cost of equity, and a growth rate to determine the value of a company. This
is a fairly accurate model. The cost of equity we used was 16%. To determine our
112 | P a g e
long run return on equity, we used our forecasted financials. Our return on equity
came out to about 94% which is unusually high. We used a growth rate of 8% and a
book value of equity of 2,286.2 (in millions). Once we arrived at our inputs, we were
now able to calculate our long run return on equity perpetuity. We used the following
equation:
= BVEo * (1+ (ROE-Ke) / (Ke-g))
After using our inputs in this equation, we arrived at a market value of equity of
$24,548.07. We then divided this number by our shares to get an initial share price of
$48.15. We made this price time consistent by multiplying it by 1+ our growth rate and
taking that to the 3/12 power. We arrived at a time consistent price of $49.97. After
comparing this price with our observed price of $77.41, it is easy to see that Colgate is
overvalued. Next, we will analyze the sensitivity of these three tables to determine how
accurate our assumption is.
Undervalued > 89.30
Fairly Valued
Overvalued < 65.03
growth rate
0.02 0.04 0.06 0.08 0.1 0.12
0.124 39.67 48.05 61.66 87.65 156.96 919.32
Ke 0.144 38.81 46.98 60.26 85.61 153.22 896.90
0.164 37.95 45.91 58.86 83.57 149.48 874.48
0.184 37.08 44.85 57.46 81.54 145.75 852.06
0.204 36.22 43.78 56.06 79.50 142.01 829.63
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ROE
0.92 0.93 0.94 0.95 0.96 0.97
0.124 85.61 86.63 87.65 88.67 89.69 90.71
Ke 0.144 58.86 59.56 60.26 60.96 61.66 62.36
0.164 44.85 45.38 45.91 46.45 46.98 47.51
0.184 36.22 36.65 37.08 37.51 37.95 38.38
0.204 30.38 30.74 31.10 31.46 31.83 32.19
ROE
0.92 0.93 0.94 0.95 0.96 0.97
0.05 35.47 35.88 36.28 36.69 37.10 37.51
0.06 38.57 39.02 39.46 39.91 40.36 40.81
Growth 0.07 42.35 42.85 43.35 43.85 44.35 44.85
0.08 47.09 47.65 48.21 48.77 49.33 49.89
0.09 53.17 53.81 54.45 55.10 55.74 56.38
0.1 61.29 62.04 62.78 63.53 64.28 65.03
The sensitivity analysis of the tables above, support our earlier findings that
Colgate is overvalued. Even after we change the growth rates, cost of equity, and
return on equity, we still find it very difficult to achieve our observed share price of
$77.41. A growth rate of 8% gives us our best estimate of the share price. In
conclusion, this model’s sensitivity analysis proves that Colgate-Palmolive is overvalued.
Assume 8%
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Abnormal Earnings Growth Model
The abnormal earnings growth model (AEG) is used to find a share price with a
high degree of accuracy. This model uses forecasted net income, forecasted dividends,
dividend reinvestment plan (DRIP), and core earnings. This model is tied in to the
residual income model because changes in the residual income should equal the
abnormal earning growth year by year. A failure to have these numbers match up
could be the result of an internal flaw.
We first started by estimating our drip income, which is dividends of the previous year
times our cost of equity. Next, we added our net earnings to our drip income to get our
cumulative dividend income. From there, we subtracted our benchmark income to get
our abnormal earnings growth for each year. The AEG YBY numbers should equal our
change in residual income. These values matched up for Colgate.
2009 2010 2011 2012 2013 2014 2015 2016 2017
AEG
YBY
(30.21) (29.85) (29.19) (28.17) (26.73) (24.81) (22.33) (19.20) (15.33)
Change
in
Residual
income
(30.21) (29.85) (29.19) (28.17) (26.73) (24.81) (22.33) (19.20) (15.33)
We then took our annual residual income and multiplied it by the present value
factor to determine our present value residual income of each year. Next we forecasted
out our annual residual income for 2018 and arrived at a number of 1,337. We then
took that number and divided it by our cost of equity minus our growth rate to discount
it back to 2009. Using that number we multiplied it by the present value factor of year
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10 to get our terminal value perpetuity. Next, we added our terminal value of
perpetuity to our book value of equity, plus each year’s present value of residual
income to arrive at our market value of equity. From there, we divided by our shares to
get our initial share price of $23.71. We then made it time consistent to get a price of
$24.66.
Undervalued > 89.30
Fairly Valued
Overvalued < 65.03
Growth
rate
0 -0.1 -0.2 -0.3 -0.4 -0.5
0.09 67.69 59.68 57.19 55.97 55.26 54.79
0.11 45.93 42.95 41.9 41.36 41.03 40.81
Ke 0.13 33.58 32.57 32.17 31.95 31.82 31.73
0.15 25.9 25.69 25.6 25.54 25.51 25.49
0.17 20.79 20.9 20.95 20.98 20.99 21.01
0.19 17.22 17.44 17.55 17.62 17.66 17.69
0.21 14.62 14.87 14.99 15.07 15.13 15.16
The sensitivity analysis performed on the AEG model explains that Colgate is
fairly valued when using a cost of equity of 9% and a growth rate of 0. As the cost of
equity increases and the growth rate decreases, Colgate’s share price decreases. The
AEG model is sensitive to changes of the cost of equity and the growth rate. In order
to achieve the observed share price of $77.41, the cost of equity would have to
decrease from 9% to about 8%, with a growth rate of 0, giving us a new price at
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$85.37. We can conclude that when using the AEG model, Colgate-Palmolive is
moderately overvalued.
Credit Analysis
A firm’s credit worthiness is important to investors in order to evaluate a level of
security in a firm. In any industry, the Altman Z-Score is used to evaluate the level of
bankruptcy associated with the given firm under analysis. According to the textbook,
Business Analysis and Valuation, companies with a Z-Score of between 1.81 and 2.67
are “labeled the gray area” as they are neutral in which direction they will go.
Therefore, a Z-Score of 3 or higher represents a credit worthy institution that does not
fear bankruptcy. Colgate-Palmolive has the highest constant Z-Scores throughout time
and can be seen in the following tables.
Z-Score Ratio
2003 2004 2005 2006 2007
Colgate
7.19
6.57 7.01 6.68 6.80
Proctor &
Gamble
6.69
4.85
5.00
2.46
3.03
Clorox 4.46
4.73
4.27
4.49
3.17
Church &
Dwight
5.05
3.18
3.44
3.16
3.38
Colgate maintains the highest Z-Scores from 2003 through 2007 compared to its
industry competitors. Furthermore, their significantly high Z-Scores present their
bankruptcy avoidance and also represent their no-failure rate. It can be seen that the
industry as a whole is stable.
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Analyst Recommendation
After extensive research of Colgate-Palmolive, we have concluded that this
company is highly overvalued. We were able to come to this conclusion based on our
research of the industry analysis, the , the financial analysis, forecasting the financial
statements, and after several valuation models. We believe that Colgate-Palmolive
stock should be sold following our research and analysis.
We researched the industry of personal products by comparing Colgate with
three of their major competitors by using the Five Forces Model. The competitors we
compared Colgate with include Proctor & Gamble, Clorox Company, and Church &
Dwight. This industry is very competitive and these companies must compete on cost
leadership and product differentiation to be efficient and effective. Although there is
high rivalry among existing firms in this industry, Colgate-Palmolive does a good job at
staying with the industry average.
Our accounting analysis reveals that Colgate-Palmolive does a fairly good job of
disclosure in their 10-K report. Our only areas of concern deal with goodwill and
section on the balance sheet titled other liabilities. Other liabilities consist of a large
portion of total liabilities, but Colgate does not disclose what these other liabilities are.
After running many diagnostic ratios, we have concluded that Colgate does not appear
to manipulate their financial statements.
We forecasted out the next ten years for Colgate’s financial statements using an
8% growth rate. There were no major problems found in the forecasts. Our forecast
showed a steady growth of our net income. We ran a number of valuation models to
determine whether Colgate was undervalued, fairly valued, or overvalued. Many of the
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valuation models displayed that Colgate was highly overvalued, while the long run
residual income model showed that Colgate was moderately overvalued.
Colgate-Palmolive has an observed price of about $77.41. After all our research
and analysis, we suggest that this company’s stock be sold. We believe that Colgate’s
stock price will slowly start to decline within the next few months.
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Appendix
10 Year Regression
Regression Statistics Multiple R 0.234205169 R Square 0.054852061 Adjusted R Square 0.041349948 Standard Error 0.042678192 Observations 72 ANOVA
df SS MS F Significance
F Regression 1 0.007399515 0.007399515 4.062479648 0.047686671 Residual 70 0.127499966 0.001821428 Total 71 0.134899481
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.006630937 0.005029694 1.318357983 0.191681405 -
0.003400471 0.016662344 -
0.003400471 0.01666X Variable 1 0.290956772 0.144355345 2.015559388 0.047686671 0.003049117 0.578864426 0.003049117 0.57886
Regression Statistics Multiple R 0.219238729 R Square 0.04806562 Adjusted R quare 0.031652958 tandard
Error 0.042485368 Observations 60
ANOVA
df SS MS F Significance
F Regression 1 0.005286087 0.005286087 2.92856948 0.092368079 Residual 58 0.104690375 0.001805006 otal 59 0.109976462
Coefficients Standard t Stat P-value Lower 95% Upper 95% Lower Upper
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Regression Statistic
Multiple R 0.318850043 R Square 0.10166535 Adjusted R Square 0.082136336 Standard Error 0.040191477 Observations 48 ANOVA
df SS MS F Significance
F Regression 1 0.008409314 0.008409314 5.20586186 0.027186193 Residual 46 0.074306321 0.001615355 Total 47 0.082715635
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.008607988 0.005803795 1.483165342 0.1448501 -
0.003074446 0.020290421 -
0.003074446 0.020290X Variable 1 0.558543921 0.244799772 2.281635786 0.027186193 0.065787544 1.051300298 0.065787544 1.051300
Error 95.0% 95.0% ntercept 0.007475803 0.005592943 1.336649144 0.186556982 -0.00371969 0.018671296 -0.00371969 0.018671296
X Variable 1 0.366068255 0.213911584 1.711306366 0.092368079 -
0.062122299 0.794258809 -
0.062122299 0.794258809
Regression Statistics Multiple R 0.392072424 R Square 0.153720786 Adjusted R quare 0.12883022 tandard
Error 0.026494142 Observations 36
ANOVA
df SS MS F Significance
F Regression 1 0.004335084 0.004335084 6.175865623 0.018031039 Residual 34 0.023865946 0.00070194
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5 Year Regression
otal 35 0.02820103
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper 95.0%
ntercept 0.011707804 0.004417484 2.650333308 0.012117626 0.002730397 0.020685211 0.002730397 0.02068521X Variable 1 0.452441548 0.18205959 2.485128895 0.018031039 0.082451948 0.822431149 0.082451948 0.822431149
Regression Statistics Multiple R 0.286449776 R Square 0.082053474 Adjusted R Square 0.040328632 Standard Error 0.028942056 Observations 24
ANOVA
df SS MS F Significance
F Regression 1 0.001647256 0.001647256 1.966537683 0.174769475 Residual 22 0.018428137 0.000837643 Total 23 0.020075393
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper 95.0%
ntercept 0.015748174 0.005907775 2.665669157 0.014123673 0.003496198 0.02800015 0.003496198 0.02800015
X Variable 1 0.319411812 0.227771738 1.402332943 0.174769475 -
0.152957859 0.791781483 -
0.152957859 0.791781483
Regression Statistics Multiple R 0.233505374 R Square 0.05452476 Adjusted R quare 0.04101797 tandard
Error 0.042685581 Observations 72
ANOVA
df SS MS F Significance
F Regression 1 0.007355362 0.007355362 4.03684095 0.04837447 Residual 70 0.127544119 0.001822059 otal 71 0.134899481
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper 95.0%
ntercept 0.006481032 0.005031332 1.28813451 0.201940969 -
0.003553642 0.016515706 -
0.003553642 0.016515706X Variable 1 0.290379984 0.144525958 2.009189128 0.04837447 0.002132053 0.578627914 0.002132053 0.578627914
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Regression Statistics Multiple R 0.218548016 R Square 0.047763235 Adjusted R Square 0.03134536 Standard Error 0.042492115 Observations 60 ANOVA
df SS MS F Significance
F Regression 1 0.005252832 0.005252832 2.909221489 0.093424918 Residual 58 0.10472363 0.00180558 Total 59 0.109976462
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0
Intercept 0.007331383 0.005611741 1.306436365 0.196561241 -
0.003901738 0.018564504 -
0.003901738 0.01856
X Variable 1 0.364712545 0.213826885 1.70564401 0.093424918 -
0.063308465 0.792733556 -
0.063308465 0.79273
Regression Statistics Multiple R 0.318691337 R Square 0.101564168 Adjusted R Square 0.082032955 Standard Error 0.04019374 Observations 48 ANOVA
df SS MS F Significance
F Regression 1 0.008400945 0.008400945 5.200095082 0.027267052 Residual 46 0.07431469 0.001615537 Total 47 0.082715635
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.008474341 0.005806193 1.45953469 0.151213836 -0.00321292 0.020161602 -0.00321292 0.020161X Variable 1 0.562037257 0.246467388 2.280371698 0.027267052 0.065924143 1.05815037 0.065924143 1.05815
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Regression Statistics Multiple R 0.391460701 R Square 0.15324148 Adjusted R Square 0.128336818 Standard Error 0.026501644 Observations 36 ANOVA
df SS MS F Significance
F Regression 1 0.004321568 0.004321568 6.153124186 0.018227479 Residual 34 0.023879462 0.000702337 Total 35 0.02820103
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.011666044 0.004419253 2.639822933 0.012432545 0.002685043 0.020647046 0.002685043 0.020647X Variable 1 0.455500348 0.183628833 2.48054917 0.018227479 0.082321664 0.828679033 0.082321664 0.828679
Regression Statistics Multiple R 0.282299458 R Square 0.079692984 Adjusted R Square 0.037860847 Standard Error 0.028979244 Observations 24 ANOVA
df SS MS F Significance
F Regression 1 0.001599868 0.001599868 1.905066052 0.181377593 Residual 22 0.018475525 0.000839797 Total 23 0.020075393
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.015690004 0.005915557 2.652328963 0.014550624 0.003421889 0.027958119 0.003421889 0.027958
X Variable 1 0.318074319 0.230448342 1.380241302 0.181377593 -
0.159846288 0.795994927 -
0.159846288 0.795994
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2 Year Regression
Regression Statistics Multiple R 0.235756577 R Square 0.055581164 Adjusted R Square 0.042089466 Standard Error 0.042661728 Observations 72 ANOVA
df SS MS F Significance
F Regression 1 0.00749787 0.00749787 4.11965677 0.046190507 Residual 70 0.127401611 0.001820023 Total 71 0.134899481
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.006316545 0.005030578 1.255630094 0.213425264 -
0.003716626 0.016349716 -
0.003716626 0.016349X Variable 1 0.292042792 0.14388515 2.029693763 0.046190507 0.005072912 0.579012672 0.005072912 0.579012
Regression Statistics Multiple R 0.221237499 R Square 0.048946031 Adjusted R Square 0.032548549 Standard Error 0.042465717 Observations 60 ANOVA
df SS MS F Significance
F Regression 1 0.005382911 0.005382911 2.98497235 0.08936244 Residual 58 0.104593551 0.001803337 Total 59 0.109976462
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Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.006971346 0.005652327 1.233358546 0.222417182 -
0.004343016 0.018285708 -
0.004343016 0.018285
X Variable 1 0.371059231 0.214769736 1.727707252 0.08936244 -
0.058849102 0.800967563 -
0.058849102 0.800967
Regression Statistics Multiple R 0.319375112 R Square 0.102000462 Adjusted R Square 0.082478733 Standard Error 0.04018398 Observations 48 ANOVA
df SS MS F Significance
F Regression 1 0.008437033 0.008437033 5.224970673 0.0269201 Residual 46 0.074278602 0.001614752 Total 47 0.082715635
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.007767645 0.005825405 1.333408492 0.188963527 -
0.003958288 0.019493578 -
0.003958288 0.019493X Variable 1 0.557761741 0.244009532 2.285819475 0.0269201 0.066596035 1.048927448 0.066596035 1.048927
Regression Statistics Multiple R 0.385925351 R Square 0.148938377 Adjusted R Square 0.123907152 Standard Error 0.026568897 Observations 36 ANOVA
df SS MS F Significance
F Regression 1 0.004200216 0.004200216 5.950103574 0.020087732 Residual 34 0.024000814 0.000705906
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Total 35 0.02820103
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.011062056 0.004445551 2.488343187 0.017894325 0.00202761 0.020096502 0.00202761 0.020096X Variable 1 0.444559413 0.182250005 2.439283414 0.020087732 0.074182844 0.814935983 0.074182844 0.814935
Regression Statistics Multiple R 0.281501573 R Square 0.079243136 Adjusted R Square 0.037390551 Standard Error 0.028986326 Observations 24 ANOVA
df SS MS F Significance
F Regression 1 0.001590837 0.001590837 1.893386902 0.182667468 Residual 22 0.018484556 0.000840207 Total 23 0.020075393
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.015371459 0.005923409 2.59503591 0.016526204 0.003087061 0.027655857 0.003087061 0.027655
X Variable 1 0.313330068 0.22771015 1.376003961 0.182667468 -
0.158911877 0.785572013 -
0.158911877 0.785572
6 Month Regression
Regression Statistics Multiple R 0.229214736 R Square 0.052539395 Adjusted R Square 0.039004244 Standard Error 0.042730375 Observations 72 ANOVA
df SS MS F Significance
F Regression 1 0.007087537 0.007087537 3.881699826 0.052771886
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Residual 70 0.127811944 0.001825885 Total 71 0.134899481
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.006262873 0.005039853 1.2426698 0.218136213 -
0.003788797 0.016314543 -
0.003788797 0.016314
X Variable 1 0.285500735 0.144909299 1.970202991 0.052771886 -
0.003511746 0.574513215 -
0.003511746 0.574513
Regression Statistics Multiple R 0.213136814 R Square 0.045427302 Adjusted R Square 0.028969152 Standard Error 0.042544202 Observations 60 ANOVA
df SS MS F Significance
F Regression 1 0.004995934 0.004995934 2.7601706 0.102034567 Residual 58 0.104980528 0.001810009 Total 59 0.109976462
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.007178222 0.005645649 1.271460872 0.208639911 -
0.004122772 0.018479216 -
0.004122772 0.018479
X Variable 1 0.353985681 0.213067756 1.661376116 0.102034567 -
0.072515768 0.78048713 -
0.072515768 0.78048
Regression Statistics Multiple R 0.313937611 R Square 0.098556824 Adjusted R Square 0.078960233 Standard Error 0.040260954 Observations 48 ANOVA
df SS MS F Significance
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F Regression 1 0.00815219 0.00815219 5.02928417 0.029783681 Residual 46 0.074563445 0.001620944 Total 47 0.082715635
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.008289054 0.005820016 1.424232014 0.161128155 -
0.003426031 0.020004138 -
0.003426031 0.020004X Variable 1 0.55547546 0.247691891 2.242606557 0.029783681 0.05689755 1.05405337 0.05689755 1.05405
Regression Statistics Multiple R 0.389608157 R Square 0.151794516 Adjusted R Square 0.126847296 Standard Error 0.026524278 Observations 36 ANOVA
df SS MS F Significance
F Regression 1 0.004280762 0.004280762 6.084626465 0.018833322 Residual 34 0.023920268 0.000703537 Total 35 0.02820103
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.011663572 0.004423082 2.636978709 0.012519057 0.002674789 0.020652355 0.002674789 0.020652X Variable 1 0.454888816 0.184411627 2.466703562 0.018833322 0.080119303 0.82965833 0.080119303 0.82965
Regression Statistics Multiple R 0.282806896 R Square 0.07997974 Adjusted R Square 0.038160638 Standard Error 0.028974729 Observations 24 ANOVA
129 | P a g e
df SS MS F Significance
F Regression 1 0.001605625 0.001605625 1.912516894 0.180560537 Residual 22 0.018469768 0.000839535 Total 23 0.020075393
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Upper 95.0%
Intercept 0.015734843 0.005914462 2.660401423 0.014290836 0.003469 0.028000686 0.003469 0.0280006
X Variable 1 0.319751752 0.231211959 1.382937777 0.180560537 -0.1597525 0.799256004 -
0.1597525 0.7992560
3 Month Regression
Regression Statistics Multiple R 0.229078893 R Square 0.052477139 Adjusted R Square 0.038941098 Standard Error 0.042731778 Observations 72 ANOVA
df SS MS F Significance
F Regression 1 0.007079139 0.007079139 3.876845496 0.052916278 Residual 70 0.127820342 0.001826005 Total 71 0.134899481
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.006227809 0.005040767 1.235488256 0.220779291 -
0.003825684 0.016281302 -
0.003825684 0.016281
X Variable 1 0.285351052 0.144923973 1.968970669 0.052916278 -
0.003690694 0.574392797 -
0.003690694 0.574392
Regression Statistics Multiple R 0.213008209 R Square 0.045372497 Adjusted R Square 0.028913402 Standard 0.042545423
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Error
Observations 60 ANOVA
df SS MS F Significance
F Regression 1 0.004989907 0.004989907 2.756682395 0.102246424 Residual 58 0.104986555 0.001810113 Total 59 0.109976462
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.007129633 0.005652841 1.261247811 0.21226903 -
0.004185757 0.018445023 -
0.004185757 0.018445
X Variable 1 0.354019311 0.213222773 1.660325991 0.102246424 -
0.072792437 0.780831059 -
0.072792437 0.780831
Regression Statistics Multiple R 0.313707699 R Square 0.098412521 Adjusted R Square 0.078812793 Standard Error 0.040264177 Observations 48 ANOVA
df SS MS F Significance
F Regression 1 0.008140254 0.008140254 5.021116699 0.029910134 Residual 46 0.074575381 0.001621204 Total 47 0.082715635
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.008201282 0.005822787 1.408480414 0.165712315 -
0.003519381 0.019921944 -
0.003519381 0.019921X Variable 1 0.555087581 0.247720161 2.24078484 0.029910134 0.056452767 1.053722394 0.056452767 1.053722
Regression Statistics Multiple R 0.389614998 R Square 0.151799846 Adjusted R 0.126852783
131 | P a g e
Square Standard Error 0.026524194 Observations 36 ANOVA
df SS MS F Significance
F Regression 1 0.004280912 0.004280912 6.084878379 0.018831054 Residual 34 0.023920118 0.000703533 Total 35 0.02820103
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.011598728 0.004424006 2.621770502 0.012991162 0.002608066 0.020589389 0.002608066 0.020589X Variable 1 0.454981185 0.184445255 2.466754625 0.018831054 0.080143331 0.829819039 0.080143331 0.829819
Regression Statistics Multiple R 0.283329775 R Square 0.080275762 Adjusted R Square 0.038470114 Standard Error 0.028970067 Observations 24 ANOVA
df SS MS F Significance
F Regression 1 0.001611567 0.001611567 1.920213346 0.17972128 Residual 22 0.018463826 0.000839265 Total 23 0.020075393
Coefficients Standard
Error t Stat P-value Lower 95% Upper 95% Lower 95.0%
Uppe95.0%
Intercept 0.015701425 0.005913622 2.655128387 0.014460033 0.003437324 0.027965527 0.003437324 0.027965
X Variable 1 0.320394656 0.231212081 1.385717628 0.17972128 -
0.159109849 0.799899161 -
0.159109849 0.799899
132 | P a g e
GrowthAssumeForecast
Income Statement2003
20042005
20062007
20082009
20102011
20122013
20142015
20162017
Net sales9,903.4
10,584.211,396.9
12,237.713,789.70
0.08100%
14,892.8816,084.31
17,371.0518,760.73
20,261.5921,882.52
23,633.1225,523.77
27,565.6729,770.93
Cost of sales4,456.1
4,747.25,191.9
5,536.16,042. 3
0.0844%
6,525.687,047.74
7,611.568,220.48
8,878.129,588.37
10,355.4411,183.88
12,078.5913,044.87
Gross profit5,447. 3
5,837.06,205.0
6,701.67,747.40
0.0856%
8,367.199,036.57
9,759.4910,540.25
11,383.4712,294.15
13,277.6814,339.90
15,487.0916,726.06
0.560.56
0.5 60.56
0.560.56
0.560.56
0.560.56
Selling, general and administrative expenses3,296. 3
3,624.63,920.8
4,355.24,973.0 0
0.0836%
5,370.845,800.51
6,264.556,765.71
7,306.977,891.53
8,522.859,204.68
9,941.0510,736.33
Other (income) expense, net(15.0)
90.369.2
185. 9121.3
0.12Operating profit
2,166. 02,122.1
2,215.02,160.5
2,653.1020%
2,996.353,236.06
3,494.943,774.54
4,076.504,402.62
4,754.835,135.22
5,546.045,989.72
Interest expense, net 124.1
119.7136.0
158.7156.6
Income before income taxes2,041. 9
2,002.42,079.0
2,001.82,496.50
Provision for income taxes620.6
675.3727.6
648.4759.1
Net Income1,421.3
$ 1,327.1
$ 1,351.4
$ 1,353.4
$ 1,737.4
$ 0.08
13%1,876.39
$ 2,026.50
$ 2,188.62
$ 2,363.71
$ 2,552.81
$ 2,757.04
$ 2,977.60
$ 3,215.81
$ 3,473.07
$ 3,750.92
$
Earnings per common share, basic2.60
2.452.54
2.573.35
Earnings per common share, diluted2.46
2.332.43
2.463.20
133 | P a g e
Common Size Income Statement2003
20042005
20062007
20082009
20102011
20122013
20142015
20162017
Net Sales100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
100%100%
Cost of Slaes-45%
-44.90%-45.60%
-45.20%-43.80%
44%44%
44%44%
44%44%
44%44%
44%44%
Gross Profit 55%
55.10%54.40%
54.856.20%
56%56%
56%56%
56%56%
56%56%
56%56%
Selling, general and administrative expenses33.28%
34.25%34.40%
35.59%36.06%
36%36%
36%36%
36%36%
36%36%
36%36%
Other (income) expense, net-0.15%
0.85%0.61%
1.52%0.88%
Operating profit21.87%
20.05%19.44%
17.65%19.24%
20%20%
20%20%
20%20%
20%20%
20%20%
Interest expense, net 1.25%
1.13%1.19%
1.30%1.14%
1%1%
1%1%
1%1%
1%1%
1%1%
Income before income taxes20.62%
18.92%18.24%
16.36%18.10%
Provision for income taxes6.27%
6.38%6.38%
5.30%5.50%
6%6%
6%6%
6%6%
6%6%
6%6%
Net Income14.35%
12.54%11.86%
11.06%12.60%
13%13%
13%13%
13%13%
13%13%
13%13%
Earnings per common share, basic0.03%
0.02%0.02%
0.02%0.02%
Earnings per common share, diluted0.02%
0.02%0.02%
0.02%0.02%
134 | P a g e
Dollars in Millions Except Per Share Am
ountsConsolidated Balance Sheets(Before Adjustm
ents)As of Decem
ber 31,
20032004
20052006
20072008
20092010
20112012
20132014
20152016
2017AssetsCurrent Assets
Cash and cash equivalents265.3
319.6340.7
489.5428.7
Receivables (less allowances of $46.4 and $41.7, respectively)1222.4
1319.91309.4
1523.21680.7
Inventories718.3
845.5855.8
1008.41171
Other current assets290.5
254.9251.2
279.9338.1
Total current assets2496.5
2739.92757.1
33013618.5
4331.384651.90
4996.145365.85
5762.936189.38
6647.407139.31
7667.628235.02
Property, plant and equipment, net
2542.22647.7
2544.12696.1
3015.2Goodwill, net
1299.41891.7
1845.72081.8
2272Other intangible assets, net
597.6832.4
783.2831.1
844.8Other assets
543.1561.2
577228
361.5Total NonCurrent Assets
4982.35933
57505837
6493.57422.70
7971.988561.91
9195.499875.95
10606.7711391.67
12234.6613140.03
14112.39 Total assets
7478.88672.9
8507.19138
1011211754.08
12623.8813558.0 5
14561.3415638.88
16796.1618039.07
19373.9720807.64
22347.40ATO 1.26
Liabilities and Shareholders’ EquityCurrent Liabilities
Notes and loans payable 103.6
134.3171.5
174.1155.9
Current portion of long-term debt
314.4451.3
356.7776.7
138.1Accounts payable
753.6864.4
876.11039.7
1066.8Accrued incom
e taxes183.8
153.1215.5
161.5262.7
Other accruals1090
1127.61123.2
1317.11539.2
Total current liabilities2445.4
2730.72743
3469.13162.7
4331.384651.90
4996.145365.85
5762.936189.38
6647.407139.31
7667.628235.02
Long-term Long Term
Debt2684.9
3089.52918
2720.43221.9
Deferred inDeferred Income Taxes
456509.6
554.7309.9
264.1Other liabilOther Liabilities
1005.41097.7
941.31227.7
1177.1Total Non Current Liabilities
4146.34696.8
44144258
4663.1 Total liabilities
6591.77427.5
71577727.1
7825.89520.80
10225.3410982.02
11794.6912667.49
13604.8914611.65
15692.9116854.19
18101.40
Comm
itments and contingent liabilities
20082009
20102011
20122013
20142015
20162017
Shareholders’ EquityPreference Stock
292.9274
253.7222.7
197.5Com
mon stock, $1 par value
(1,000,000,000 shares authorized, 732,853,180 shares issued)732.9
732.9732.9
732.9732.9
Additional paid-in capital1126.2
1093.81064.4
1218.11517.7
Retained earnings7433
8223.98968.1
9643.710627.5
11777.5912649.13
13585.1614590.46
15670.1616829.75
18075.1519412.72
20849.2622392.1
Accumulated other com
prehensive income
-1866.8-1806.2
-1804.7-2081.2
-1666.87718.2
8518.49214.4
9736.211408.8
Unearned compensation
-331.2-307.6
-283.3-251.4
-218.9Treasury stock, at cost
-6499.9-6965.4
-7581-8073.9
-8903.7 Total shareholders’ equity
887.11245.4
1350.11410.9
2286.22233.28
2398.542576.03
2766.652971.39
3191.273427.42
3681.053953.45
4246.01 Total liabilities and shareholder's equit y
7478.89182.5
8507.19138
1011211754.08
12623.8813558.05
14561.3415638.88
16796.1618039.07
19373.9720807.64
22347.40
135 | P a g e
Common Size Balance Sheet(Before Adjustments)
Assets2003
20042005
20062007
20082009
20102011
20122013
20142015
20162017
Current AssetsCash and cash equivalents3.55%
3.69%4.00%
5.36%4.24%
Receivables (less allowances of $46.4 and $41.7, respectively)16.34%
15.22%15.39%
16.67%16.62%
16.60%16.60%
16.60%16.60%
16.60%16.60%
16.60%16.60%
16.60%16.60%
Inventories9.60%
9.75%10.06%
11.04%11.58%
Other current assets3.88%
2.94%2.95%
3.06%3.34%
Total current assets33.38%
31.59%32.41%
36.12%35.78%
36.85%36.85%
36.85%36.85%
36.85%36.85%
36.85%36.85%
36.85%36.85%
Property, plant and equipment, net33.99%
30.53%29.91%
29.50%29.82%
Goodwill, net17.37%
21.81%21.70%
22.78%22.47%
22.00%22.00%
22.00%22.00%
22.00%22.00%
22.00%22.00%
22.00%22.00%
Other intangible assets, net7.99%
9.60%9.21%
9.09%8.35%
Other assets7.26%
6.47%6.78%
2.50%3.57%
Total Non Current Assets66.62%
68.41%67.59%
63.88%64.22%
63.15%63.15%
63.15%63.15%
63.15%63.15%
63.15%63.15%
63.15%63.15%
Total assets100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
Liabilities and Shareholders’ Equit yCurrent Liabilities
Notes and loans payable 1.39%
1.46%2.02%
1.91%1.54%
Current portion of long-term debt4.20%
4.91%4.19%
8.50%1.37%
Accounts payable10.08%
9.41%10.30%
11.38%10.55%
Accrued income taxes2.46%
1.67%2.53%
1.77%2.60%
Other accruals14.57%
12.28%13.20%
14.41%15.22%
Total current liabilities32.70%
29.74%32.24%
37.96%31.28%
32.50%32.50%
32.50%32.50%
32.50%32.50%
32.50%32.50%
32.50%32.50%
Long-term Long Term Debt35.90%
33.65%34.30%
29.77%31.86%
Deferred i nDeferred Income Taxes6.10%
5.55%6.52%
3.39%2.61%
Other liabilOther Liabilities13.44%
11.95%11.06%
13.44%11.64%
Total NonCurrent Liabilities55.44%
51.15%51.89%
46.60%46.11%
Total liabilities88.14%
80.89%84.13%
84.56%77.39%
81.00%81.00%
81.00%81.00%
81.00%81.00%
81.00%81.00%
81.00%81.00%
Commitments and contingent liabilities
Shareholders’ Equit yPreference Stock
3.92%2.98%
2.98%2.44%
1.95%Common stock, $1 par value(1,000,000,000 shares authorized, 732,853,180 shares issued)
9.80%7.98%
8.62%8.02%
7.25%Additional paid-in capital
15.06%11.91%
12.51%13.33%
15.01%Retained earnings
99.39%89.56%
105.42%105.53%
105.10%103.00%
103.00%103.00%
103.00%103.00%
103.00%103.00%
103.00%103.00%
103.00%Accumulated other comprehensive income
-24.96%-19.67%
-21.21%-22.78%
-16.48%103.20%
92.77%108.31%
106.55%112.82%
Unearned compensation-4.43%
-3.35%-3.33%
-2.75%-2.16%
Treasury stock, at cost-86.91%
-75.86%-89.11%
-88.36%-88.05%
Total shareholders’ equit y11.86%
13.56%15.87%
15.44%22.61%
19.00%19.00%
19.00%19.00%
19.00%19.00%
19.00%19.00%
19.00%19.00%
Total liabilities and shareholder's equit y100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
100.00%100.00%
136 | P a g e
2003
20042005
20062007
20082009
20102011
20122013
20142015
20162017
Operating ActivitiesNet income
1,421.301,327.10
1,351.401,353.40
1,737.40 1963.2622238.119
2551.4552908.659
3315.8713780.093
4309.3064912.609
5600.3756384.427
Adjustments to reconcile net income to net cash provided by operations:
Restructuring, net of cash53.80
38.30111.60
145.4021.30
Depreciation and amortization315.50
327.80329.30
328.70333.90
Gain before tax on sale of non-core product lines(107.20)
(26.70)(147.90)
(46.50)(48.60)
Stock-based compensation expense(48.80)
29.3041.10
116.90110.30
20082009
20102011
20122013
2014201 5
20162017
Cash effects of changes in: 14810.14
15906.0917083.14
18347.2919704.99
21163.1622729.23
24411.226217.63
28157.73Receivables
(14.40)(5.60)
(24.10)(116.00)
(66.50)Inventorie s
(3.10)(76.10)
(46.80)(118.50)
(111.50)Accounts payables and other accruals
188.7080.10
152.70149.90
366.20 Other non-current assets and liabilitie s
(38.10)60.10
17.108.20
8.60Net cash provided by operation s
1,767.701,754.30
1,784.401,821.50
2,203.702517.72
2704.0352904.134
3119.0393349.848
3597.7373863.97
4149.9034456.996
4786.814
Investing ActivitiesCapital expenditures
(302.10)(348.10)
(389.20)(476.40)
(583.10)Payment for acquisitions, net of cash acquired
0.00(800.70)
(38.50)(200.00)
(26.50)Sale of non-core product lines and propert y
127.6037.00
215.6055.00
109.70 Purchases of marketable securities and investments
(43.20)(127.70)
(20.00)(1.20)
(11.00)Proceeds from sales of marketable securities and investments
85.10147.30
10.000.00
Other15.00
1.801.40
2.20(17.40)
Net cash used in investing activitie s(117.60)
(1,090.40)(220.70)
(620.40)(528.30)
-600-580
-490-560
-600-625
-750-750
-750-760
Financing Activities2517.723
2704.0352904.134
3119.0393349.848
3597.7373863.97
4149.9034456.996
4786.814Principal payments on debt
(804.00)(753.90)
(2,100.30)(1,332.00)
(1,737.80)Proceeds from issuance of debt
229.201,246.50
2,021.901,471.10
1,513.10 1.6
1.761.936
2.12962.34256
2.5768162.834498
3.1179473.429742
3.772716Payments to outside investors
0.00(89.70)
0.00-
Dividends paid(506.80)
(536.20)(607.20)
(677.80)(749.60)
815.68897.248
986.97281085.67
1194.2371313.661
1445.0271589.53
1748.4831923.331
Purchases of treasury share s(554.90)
(637.90)(796.20)
(884.70)(1,269.40)
Proceeds from exercise of stock options and excess tax benefits79.30
70.4047.10
364.40489.30
Net cash used in financing activitie s(1,557.20)
(611.10)(1,524.40)
(1,059.00)(1,754.40)
Effect of exchange rate changes on Cash and cash equivalents4.50
1.50(18.20)
6.7018.20
Net increase in Cash and cash equivalents97.40
54.3021.10
148.80(60.80)
Cash and cash equivalents at beginning of year167.90
265.30319.60
340.70489.50
Cash and cash equivalents at end of year265.30
319.60340.70
489.50428.70
Supplemental Cash Flow Information
Income taxes paid498.10
593.80584.30
647.90646.50
Interest paid131.50
123.20149.90
168.30163.40
Principal payments on ESOP debt, guaranteed by the Compan y
23.5029.80
37.0045.00
53.90
Cash Flow Ratios2003
200 42005
20062007
20082009
20102011
20122013
20142015
20162017
CFFO / Sales0.18
0.170.16
0.1 50.16
0.160.14
0.170.17
0.170.17
0.170.17
0.170.17
CFFO / NI1.24
1.321.32
1.3 51.27
1.451.55
1.661.78
1.912.05
2.202.35
2.522.71
CFFO / Operating Income0.816
0.8270.806
0.8430.831
1.0801.229
1.3081.418
1.4891.564
1.6441.804
1.8772.003
CFFO / Gross Profit0.32 5
0.3010.288
0.2720.284
0.2890.301
0.3000.299
0.2980.298
0.2970.296
0.2950.294
137 | P a g e
CL
2003 2004 2005 2006 2007
WC 51,100,000.0 8,300,000.00 14,100,000.00 -45,910,000.00 455,800,000.00
TA 7,478,800,000.00 8,672,900,000.00 8,507,100,000.00 9,138,000,000.00 10,112,000,000.00
R/e 7,433,000,000.00 8,223,900,000.00 8,968,100,000.00 9,643,700,000.00 10,627,500,000.00
EBIT 1,917,800,000.00 2,122,100,000.00 2,215,000,000.00 2,160,500,000.00 2,653,100,000.00
MVE 39,720,000,000.00 39,720,000,000.00 39,720,000,000.00 39,720,000,000.00 39,720,000,000.00
BVL 6,591,700,000.00 7,427,500,000.00 7,157,000,000.00 7,727,100,000.00 7,825,800,000.00
Sales 9,903,400,000.00 10,584,200,000.00 11,396,900,000.00 12,237,700,000.00 13,789,700,000.00
PG
2003 2004 2005 2006 2007
WC 2,862,000,000.00 -5,032,000,000.00 -4,710,000,000.00 4,344,000,000.00 -6,686,000,000.00
TA 43,706,000,000.00 57,048,000,000.00 61,527,000,000.00 135,695,000,000.00 138,014,000,000.00
R/E 13,692,000,000.00 13,611,000,000.00 31,004,000,000.00 35,666,000,000.00 41,797,000,000.00
EBIT 6,969,000,000.00 8,721,000,000.00 9,147,000,000.00 11,294,000,000.00 13,406,000,000.00
MVE 213,700,000,000.00 213,700,000,000.00 213,700,000,000.00 213,700,000,000.00 213,700,000,000.00
BVL 27,520,000,000.00 39,770,000,000.00 43,052,000,000.00 72,987,000,000.00 71,254,000,000.00
SALES 43,377,000,000.00 51,407,000,000.00 56,741,000,000.00 68,222,000,000.00 76,476,000,000.00
Clorox
2003 2004 2005 2006 2007
WC -500,000,000.00 -225,000,000.00 -258,000,000.00 -123,000,000.00 -395,000,000.00
TA 3,652,000,000.00 3,834,000,000.00 3,617,000,000.00 3,616,000,000.00 3,666,000,000.00
R/E 2,565,000,000.00 2,846,000,000.00 3,684,000,000.00 3,939,000,000.00 185,000,000.00
EBIT 690,000,000.00 722,000,000.00 650,000,000.00 526,000,000.00 630,000,000.00
MVE 7,860,000,000.00 7,860,000,000.00 7,860,000,000.00 7,860,000,000.00 7,860,000,000.00
BVL 2,437,000,000.00 2,294,000,000.00 4,170,000,000.00 3,772,000,000.00 3,495,000,000.00
SALES 3,986,000,000.00 4,162,000,000.00 4,388,000,000.00 4,644,000,000.00 4,847,000,000.00
C&D
2003 2004 2005 2006 2007
WC 57,168,000.00 136,257,000.00 84,728,000.00 111,666,000.00 277,564,000.00
TA 1,119,617,000.00 1,877,998,000.00 1,962,117,000.00 2,334,154,000.00 2,532,490,000.00
138 | P a g e
R/E 435,677,000.00 510,480,000.00 618,071,000.00 740,130,000.00 891,868,000.00
EBIT 111,851,000.00 171,753,000.00 212,776,000.00 252,102,000.00 305,034,000.00
MVE 3,600,000,000.00 3,600,000,000.00 3,600,000,000.00 3,600,000,000.00 3,600,000,000.00
BVL 681,123,000.00 1,317,968,000.00 1,265,239,000.00 1,470,317,000.00 1,452,225,000.00
SALES 1,056,874,000.00 1,462,062,000.00 1,736,506,000.00 1,945,661,000.00 2,220,940,000.00
Colgate
2003 2004 2005 2006 2007
1.2(WC/TA) 0.0081992 0.0011484 0.0019889
-
0.0060289 0.0540902
1.4(RE/TA) 1.3914264 1.3275214 1.4758660 1.4774765 1.4713706
3.3*(EBIT/TA) 0.8462240 0.8074496 0.8592235 0.7802200 0.8658258
.6*(MVE/BVL) 3.6154558 3.2086166 3.3298868 3.0842101 3.0453117
1*(SALES/TA) 1.3241964 1.2203761 1.3396927 1.3392099 1.3636966
Z-SCORE 7.1855018 6.5651121 7.0066580 6.6750876 6.8002948
Proctor&Gamble
2003 2004 2005 2006 2007
1.2(WC/TA) 0.0785796
-
0.1058477
-
0.0918621 0.0384156
-
0.0581332
1.4(RE/TA) 0.4385851 0.3340240 0.7054724 0.3679752 0.4239845
3.3*(EBIT/TA) 0.5261909 0.5044752 0.4905992 0.2746616 0.3205457
.6*(MVE/BVL) 4.6591570 3.2240382 2.9782588 1.7567512 1.7994779
1*(SALES/TA) 0.9924724 0.9011184 0.9222130 0.5027599 0.5541177
Z-SCORE 6.6949850 4.8578080 5.0046814 2.9405634 3.0399927
139 | P a g e
Clorox
2003 2004 2005 2006 2007
1.2(WC/TA)
-
0.1642935
-
0.0704225
-
0.0855958
-
0.0408186
-
0.1292962
1.4(RE/TA) 0.9832968 1.0392280 1.4259331 1.5250553 0.0706492
3.3*(EBIT/TA) 0.6234940 0.6214397 0.5930329 0.4800332 0.5671031
.6*(MVE/BVL) 1.9351662 2.0557977 1.1309353 1.2502651 1.3493562
1*(SALES/TA) 1.0914567 1.0855503 1.2131601 1.2842920 1.3221495
Z-SCORE 4.4691202 4.7315932 4.2774655 4.4988271 3.1799618
C&D
2003 2004 2005 2006 2007
1.2(WC/TA) 0.0612724 0.0870653 0.0518183 0.0574080 0.1315215
1.4(RE/TA) 0.5447825 0.3805499 0.4410030 0.4439219 0.4930386
3.3*(EBIT/TA) 0.3296737 0.3018027 0.3578588 0.3564189 0.3974792
.6*(MVE/BVL) 3.1712334 1.6388865 1.7071873 1.4690710 1.4873728
1*(SALES/TA) 0.9439603 0.7785216 0.8850165 0.8335615 0.8769788
Z-SCORE 5.0509223 3.1868260 3.4428839 3.1603813 3.3863909
140 | P a g e
Cost of debt
Amount Weight Rate Weighted
Average
Current Liabilities
Notes and Loans Payable 155.9 1.99% 4.20% .0836
Current Portion of L.T.
Debt
138.1 1.76% 8.00% .1408
Accounts Payable 1066.8 13.63% 4.20% .5725
Accrued Income Taxes 262.7 3.36% 4.20% .1411
Other Accruals 1539.2 19.67% 4.20% .8261
Total Current
Liabilities
3162.7
40.41%
Long-Term Debt 3221.9 41.17% 8.00% 3.2936
Deferred Income Taxes 264.1 3.38% 6.00% .2028
Other Liabilities 1177.1 15.04% 6.00% .9024
Long Term Liabilities
4663.1
59.59%
Total Debt (Liabilities)
7825.8
100%
6.1629%
141 | P a g e
Weighted Average Cost of Capital
Vd $3973 millions
Ve $7826 millions
Total $11,789 millions
Ke 16.38%
Kd 6.16%
Tax rate 30%
Before Tax 9.60%
After Tax 8.373%
CAPM
Rf 3.75 Treasury rate
Market Risk Premium .08 assumed
Beta .455 Estimate from 3 month regression 36 month
horizon
Estimated Ke 16.38%
142 | P a g e
Method of Comparables
PPS EPS Trailing P/E Industry
Average
Colgate’s Share
Price
Colgate-Palmolive 73.68 3.2 23.05
Proctor & Gamble 66.8 3.31 20.21
Clorox 59.94 3.51 17.08
Church & Dwight 56.75 2.46 23.11
20.13
64.35
PPS EPS Forward P/E Industry
Average
Colgate’s Share
Price
Colgate-
Palmolive
73.68 4.28 17.21
Proctor &
Gamble
66.8 3.88 17.22
Clorox 59.94 4.08 14.68
Church &
Dwight
56.75 3.17 17.9
16.6
71.05
PPS BPS P/B Industry
Average
Colgate’s Share
Price
Colgate-
Palmolive
73.68 4.1 17.97
Proctor &
Gamble
66.8 21.72 3.08
Clorox 59.94 -3.99 NA
Church &
Dwight
56.75 16.31 3.48
3.28
13.45
143 | P a g e
PPS EPS PEG Industry
Average
Colgate’s Share
Price
Colgate-
Palmolive
73.68 4.28 1.72
Proctor &
Gamble
66.8 3.88 1.62
Clorox 59.94 4.08 1.59
Church &
Dwight
56.75 3.17 1.6
1.6
54.78
PPS DPS D/P Industry
Average
Colgate’s Share
Price
Colgate-
Palmolive
73.68 1.6 .022
Proctor &
Gamble
66.8 1.6 .024
Clorox 59.94 1.6 .027
Church &
Dwight
56.75 .32 .01
.019
84.21
PPS EBIDTA
(Billions)
P/EBIDTA Industry
Average
Colgate’s Share
Price
Colgate-
Palmolive
73.68 3.200 23.03
Proctor &
Gamble
66.8 19.320 3.46
Clorox 59.94 1.120 53.52
Church & Dwight 56.75 .369 153.79
28.49
91.17
144 | P a g e
EV EBIDTA
(Billions)
EV/EBIDTA Industry
Average
Colgate’s Share
Price
Colgate-
Palmolive
40.8 3.200 12.75
Proctor &
Gamble
238.02 19.320 12.32
Clorox 11.42 1.120 10.19
Church &
Dwight
4.37 .369 11.84
11.45
36.64
145 | P a g e
Residual Income
All Items in Millions of Dollars
perp0
12
34
56
78
910
20072008
20092010
20112012
20132014
20152016
20172018
Net Income (Millions)
1,876.392,026.50
2,188.622,363.71
2,552.812,757.04
2,977.603,215.81
3,473.073,750.92
Total Dividends (Millions)815.68
897.25986.97
1,085.671,194.24
1,313.661,445.03
1,589.531,748.48
1,923.33Book Value Equity (Millions)
22863,346.71
4,475.975,677.62
6,955.668,314.24
9,757.6111,290.18
12,916.4614,641.05
16,468.63Growth Rate
0.270.23
0.200.17
0.160.14
0.13Annual Norm
al Income (Becnhm
ark)388.62
568.94760.91
965.201,182.46
1,413.421,658.79
1,919.332,195.80
2,488.98Annual Residual Incom
e1,487.77
1,457.561,427.71
1,398.521,370.35
1,343.621,318.80
1,296.481,277.27
1,261.941,337.65
Change in Residual Income
(30.21)(29.85)
(29.19)(28.17)
(26.73)(24.81)
(22.33)(19.20)
(15.33)pv factor
0.850.73
0.620.53
0.460.39
0.330.28
0.240.21
YBY PV RI1,271.60
1,064.77891.42
746.32625.03
523.79439.42
369.21310.89
262.53
Book Value Equity (Millions)3947
Total PV of YBY RI6504.99
Terminal Value Perpetuity
1636.957868.56
MVE 12/31/0712088.94
divide by shares 509.8
0-0.1
-0.2-0.3
-0.4-0.5
Initial Share Price 23.71
0.0957.17
44.440.43
38.537.36
36.61tim
e consistent Price24.66
0.1143.86
36.8934.42
33.1632.39
31.870.13
35.1231.22
29.6828.68
28.3428
Observed Share Price (4/20/2008)77.41
0.1529.05
26.8525.9
25.3725.04
24.81Initial Cost of Equity (You Derive)
0.170.17
24.6623.43
22.8622.53
22.3222.17
Perpetuity Growth Rate (g)0
0.1921.38
20.7120.39
20.1920.07
19.970.21
18.8718.53
18.3618.26
18.1918.14
Undervalued- >89.03Fairly valuedOvervalued
<65.03
146 | P a g e
AEG MODEL0
12
34
56
78
910
20072008
20092010
20112012
20132014
20152016
20172018
Net Income (Millions)1,876.39
2,026.502,188.62
2,363.712,552.81
2,757.042,977.60
3,215.813,473.07
3,750.9 2Total Dividends (Millions)
815.68897.2 5
986.971,085.67
1,194.241,313.66
1,445.031,589.53
1,748.481,923.33
Drip Income138.67
152.53167.79
184.56203.0 2
223.32245.65
270.22297.24
Cumulative Dividend Income2,165.17
2,341.162,531.50
2,737.372,960.06
3,200.923,461.46
3,743.294,048.16
Normal (Benchmark) Income2,195.38
2,371.012,560.69
2,765.542,986.79
3,225.733,483.79
3,762.494,063.49
AEG YBY(30.21 )
(29.85)(29.19)
(28.17)(26.73)
(24.81)(22.33)
(19.20)(15.33)
-16.7144186Change in Residual Income
12.2215.32
18.8822.9 5
27.6132.92
38.9745.85
53.65PV Factor
0.8 50.73
0.620.53
0.460.39
0.330.28
0.24PV AEG YBY
(25.82 )(21.81)
(18.23)(15.03)
(12.19)(9.67)
(7.44)(5.47)
(3.73)
Core Earnings (of Perp)1876.39
Total PV of YBY AEG-119.393567
AEG TV Perp-6.07216714
-24.9468935Total Model Adj. Perp Earnings
1750.93Perp Capitalization Return
0.17MVE
10299.566270
-0.1-0.2
-0.3-0.4
-0. 5Divide by shares
509.80.09
67.6959.68
57.1955.97
55.2654.79
0.1145.93
42.9541.9
41.3641.03
40.81Initial Share Price
20.203150780.1 3
33.5832.57
32.1731.95
31.8231.73
Time Consistent Price21.01191187
0.1 525.9
25.6925.6
25.5425.51
25.490.17
20.7920.9
20.9520.98
20.9921.01
0.1917.2 2
17.4417.55
17.6217.66
17.69observed share price
77.410.21
14.6214.87
14.9915.07
15.1315.16
Undervalued- >89.03Initail Cost of Equity
0.17Fairly valued
Growth Rate-0.5
Overvalued<65.03
147 | P a g e
Discounted Dividends
Assuming
WACC=.096
Kd=.0616Ke=.164
Initial Cost of Equity = .164begin perp
relevant valuation item0
12
34
56
78
910
112007
20082009
20102011
20122013
20142015
20162017
2018
DIV/share1.6
1.761.94
2.132.34
2.582.83
3.123.43
3.774.15
4.56PV Facto r
10.859
0.7380.634
0.5450.468
0.4020.345
0.2970.255
0.2190.188
PV Div YBY1.51
1.431.35
1.281.21
1.141.08
1.020.96
0.910.86
PV total YBY Div11.88
TV Perpetuity54.35
PV TV Perpetuity10.23
Sensitivity Analysis54.35
Estimated Price Per Share Dec 31 2007
22.10Growth Rate
Time Consistent Estim
ated Price22.96
0.020.04
0.060.08
0.1Observed Share Price
77.450.12
23.7525.72
28.9135.00
51.26Undervalued- >89.03
Initial Cost of Equity (you derived)0.164
0.1422.40
24.0126.39
30.2537.63
Fairly valuedPerpetuity Growth Rate (g)
0.08Ke
0.1618.70
19.6621.00
22.9626.16
Overvalued <65.030.18
15.9716.57
17.3718.47
20.100.20
13.8814.27
14.7715.43
16.35
148 | P a g e
LR ROE RI MODELInitial Book value of Equity2286.2
Box 15 yr Average ROE
0.94growth rate
ProofNI(t)/Equity(t-1)
0.020.04
0.060.08
0.10.12
Ke0.16
0.12439.67
48.0561.66
87.65156.96
919.32Avg Forward Earnings Growth Rate
0.08Ke
0.14438.81
46.9860.26
85.61153.22
896.90Market Value of Equity
24548.0724548.07
0.16437.95
45.9158.86
83.57149.48
874.48Proof
BVE*(1+((ROE-Ke)/(Ke-g))0.184
37.0844.85
57.4681.54
145.75852.06
Divide by Shares509.8
0.20436.22
43.7856.06
79.50142.01
829.63Initial Share Price
48.15Time Consistant Price(Dec.31 2007)
49.97Box 2 Assuming Growth = 8%
Observed Share Price$77.41
ROE0.92
0.930.94
0.950.96
0.970.124
85.6186.63
87.6588.67
89.6990.71
Ke 0.144
58.8659.56
60.2660.96
61.6662.36
0.16444.85
45.3845.91
46.4546.98
47.510.184
36.2236.65
37.0837.51
37.9538.38
0.20430.38
30.7431.10
31.4631.83
32.19
ROE0.92
0.930.94
0.950.96
0.970.05
35.4735.88
36.2836.69
37.1037.51
0.0638.57
39.0239.46
39.9140.36
40.81Growth
0.0742.35
42.8543.35
43.8544.35
44.850.08
47.0947.65
48.2148.77
49.3349.89
0.0953.17
53.8154.45
55.1055.74
56.380.1
61.2962.04
62.7863.53
64.2865.03
Undervalued- >89.03Fairly valuedOvervalued <65.03
149 | P a g e
Discounted Free C
ash FlowW
ACC(AT)0.8373
Kd0.0616
Ke0.1638
01
23
45
67
89
10perp
200 72008
20092010
20112012
20132014
20152016
20172018
Cash Flow
From O
perations (Millions)
2517.722704.035
2904.1343119.039
3349.8483597.737
3863.974149.903
4456.9964786.81401
Cash Flow
From Investing A
ctivities-600
-580-490
-560-600
-625-750
-750-750
-760FC
F Firm1917.72
2124.032414.13
2559.042749.85
2972.743113.97
3399.903707.00
4026.814268.423
FCF annnual grow
th0.060024
0.0745630.081055
0.0475090.091823
0.0903240.08627409
PV Factor0.9433962
0.8899960.839619
0.7920940.747258
0.7049610.665057
0.6274120.591898
0.55839478PV YB
Y FCF
1809.16981890.384
2026.9532026.999
2054.8472095.662
2070.9682133.141
2194.1652248.55191
PV TV PERP
39,724
71140.3808Total PV YB
Y FCF
20,551
Time Zero PV TV Perp
39,724
MVA
60,275
Book Value D
ebt & Preferred Stock
31,576
GTM
VE28,700
0
0.030.045
0.060.075
0.090.0 6
57.12136.19
294.32D
ivide by # of shares509.8
WACC BT
0.0737.74
84.12149.05
408.78Intristic (m
odel) price at 12/31/200756.30
0.0823.3
52.9586.84
171.56764.59
Time C
onsistent Price57.12
0.0912.15
32.2252.3
92.45212.91
0.13.2 9
17.4530.33
52.87102.46
300.820.11
6.4115.14
29.1155.05
119.910.1 2
413.24
28.6559.46
WA
CC
(BT)
0.096
Book Value D
ebt & Preferred Stock
Undervalued- >
89.03Fairly valuedO
vervalued <65.03
Observed Share Price (A
s of 04/20/08)77.41
Initial WA
CC
0.06Perpetuity G
rowth R
ate (g)0
150 | P a g e
Colgate-Palmolive 2003 2004 2005 2006 2007 LIQUIDITY Current Ratio 1.02 1.003 1.005 0.952 1.144Quick Asset Ratio 0.608 0.6005 0.6014 0.5802 0.669A/R Turnover 8.1 8.02 8.706 8.035 7.156A/R Days 44.6 44.9 44.8 43.8 43.2Inventory Turnover 6.206 5.164 6.067 5.49 5.03Inventory Days 58.3 58.7 62.9 66.1 62.7Working Capital Turnover 193.79 1150.43 808.29 -728.45 83.48 PROFITABILITY Gross Profit Margin 0.5502 0.5515 0.5544 0.5476 0.5946Operating Expense Ratio Operating Profit Margin 0.2817 0.2005 0.1943 0.1765 0.1717Net Profit Margin 0.1426 0.1253 0.1449 0.1104 0.137Asset Turnover 1.324 1.22 1.34 1.339 1.248Return on Assets 0.2001 0.1774 0.1558 0.159 0.1659Return on Equity 4.056 1.495 1.085 1.002 1.074Asset Turnover - After Restatement 1.35 1.33 1.19 1.26 1.28ROA Restatement 0.194 0.166 0.142 0.139 0.161ROE Restatement 2.422 0.959 0.637 0.522 0.566 CAPITAL STRUCTURE Debt to equity ratio 7.43 5.96 5.3 5.48 3.423Times interest earned 17.54 17.73 16.29 13.35 16.31Debt service margin 5.92 5.58 3.95 5.11 2.84IGR 12.87% 10.57% 8.58% 7.95% 9.43%SGR 108.50% 73.61% 54.06% 51.43% 41.71%Debt to equity ratio - After Restatement 4.76 3.50 2.76 2.52 1.88 P & G LIQUIDITY Current Ratio 1.23 0.773 0.812 1.22 0.782Quick Asset Ratio 0.7226 0.4304 0.4223 0.6213 0.39A/R Turnover 14.728 12.65 13.558 11.91 11.32A/R Days 25.8 25.2 26.5 26.5 29.5Inventory Turnover 6.08 5.69 5.55 5.265 5.379Inventory Days 58.5 58.5 61.7 62.2 65.2Working Capital Turnver 15.15 -10.216 -12.05 15.7 -11.224 PROFITABILITY Gross Profit Margin 0.4896 0.5122 0.501 0.5145 0.5302
151 | P a g e
Operating Expense Ratio Operating Profit Margin 0.181 0.1912 0.1926 0.1942 0.2059Net Profit Margin 0.1195 0.1261 0.1279 0.1273 0.1378Asset Turnover 0.9924 0.9011 0.9222 0.5027 0.5411Return on Assets 0.1174 0.1409 0.1214 0.1411 0.0735Return on Equity 0.3493 0.3803 0.4007 0.4969 0.1585 CAPITAL STRUCTURE Debt to equity ratio 1.7 2.3 2.52 1.16 1.07Times interest earned 14 15.62 13.102 11.84 11.85Debt service margin 14.1 8.56 5.71 4.36 6.96IGR 6.60% 8.57% 7.57% 8.09% 4.36%SGR 17.82% 28.30% 26.65% 17.45% 9.01% Clorox LIQUIDITY Current Ratio 0.655 0.823 0.808 0.891 0.723Quick Asset Ratio 0.437 0.5457 0.5222 0.5548 0.4498A/R Turnover 8.609 9.047 10.67 10.67 10.48A/R Days 41.7 39 36.2 33.2 33.7Inventory Turnover 8.428 7.93 7.718 9.19 8.919Inventory Days 42.8 43.2 45.7 41.8 39.8Working Capital Turnver -72.47 -18.49 -17.01 -37.75 -12.21 PROFITABILITY Gross Profit Margin 0.4814 0.4654 0.4319 0.4218 0.4336Operating Expense Ratio Operating Profit Margin 0.2062 0.2069 0.1789 0.1675 0.1771Net Profit Margin 0.1237 0.1319 0.2498 0.0956 0.0993Asset Turnover 1.056 1.085 1.213 1.284 1.315Return on Assets 0.1358 0.1503 0.2859 0.1227 0.1325Return on Equity 0.3641 0.4519 0.7117 -0.8029 2.801 CAPITAL STRUCTURE Debt to equity ratio 2 1.49 -7.54 -24.18 20.44Times interest earned - - 9.94 6.126 7.513Debt service margin 4.66 2.61 3.82 4.22 4.01IGR 8.26% 8.76% 23.35% 7.49% 8.41%
SGR 24.83% 21.81%-
152.70% -
173.60% 180.30%
152 | P a g e
Church & Dewight LIQUIDITY Current Ratio 1.24 1.38 1.21 1.25 1.49Quick Asset Ratio 0.793 0.875 0.772 0.769 0.977A/R Turnover 9.74 8.74 9.19 8.409 7.39A/R Days 36 34.2 37.2 39.3 39.4Inventory Turnover 8.77 6.237 7.039 7.58 5.98Inventory Days 41.2 45.8 50.6 54.1 55.1Working Capital Turnover 18.51 10.73 20.5 17.42 8.945 PROFITABILITY Gross Profit Margin 0.309 0.3648 0.3667 0.3911 0.4214Operating Expense Ratio Operating Profit Margin 0.1059 0.1175 0.1225 0.1295 0.1445Net Profit Margin 0.0766 0.0609 0.0708 0.0714 0.07136Asset Turnover 0.9441 0.7785 0.8853 0.8337 0.8137Return on Assets 0.0819 0.0795 0.0655 0.0708 0.0617Return on Equity 0.2329 0.2029 0.2196 0.1995 0.1667 CAPITAL STRUCTURE Debt to equity ratio 1.55 2.35 1.82 1.702 1.34Times interest earned 5.48 4.15 4.825 4.67 5.18Debt service margin 4.19 55.91 32.79 11.86 6.52IGR 6.93% 6.32% 5.69% 6.22% 5.45%SGR 17.69% 21.19% 16.02% 16.81% 12.78%
153 | P a g e
Restatem
ent Analysis
GW
TAB
eforeB
efore2002
20032004
20052006
20072002
20032004
20052006
20071182.8
1,299.401,891.70
1,845.702,081.80
2,272.007,087.20
7478.88672.9
8,507.109,138.00
10,112.00
After
After
20022003
20042005
20062007
20022003
20042005
20062007
946.24802.96
1,016.92601.78
421.52393.88
7,323.767,975.24
9,547.689,751.02
10,798.2811,990.12
236.56236.56
236.56236.56
236.56TA Increase
259.88259.88
259.88259.88
259.882002
20032004
20052006
2007378.34
378.34378.34
378.34236.56
496.44874.78
1,243.921,660.28
1,878.12369.14
369.14369.14
416.36416.36
454.4TE Before
20022003
20042005
20062007
Total236.56
496.44874.78
1243.921660.28
1878.12350.3
887.11245.4
1350.11410.9
2286.2
TE After
Asset Turnover - A
fter Restatem
entSales/ TA t-1
20022003
20042005
20062007
586.861,383.54
2,120.182,594.02
3,071.184,164.32
20022003
20042005
20062007
Sales
9,294.309903.4
10,584.2011,396.90
12,237.7013,789.70
TA7,323.76
7975.249547.68
9751.0210798.28
11990.12TL
AS
ST T/O
1.351.33
1.191.26
1.282002
20032004
20052006
20076736.9
6591.77427.5
71577727.1
7825.8R
eturn On Assets - A
fter Restatm
entN
I/ TA t-1N
I1421.3
1327.11351.4
1353.41737.4
TA7323.76
7975.249547.68
9751.0210798.28
11990.12TL &
SE BeforeR
OA
0.190.17
0.140.14
0.162,002.00
20032004
20052006
20077087.2
7478.88672.9
8507.19138
10112R
eturn on Equity - A
fter Restatem
ent N
I/ TE t-1N
I1421.3
1327.11351.4
1353.41737.4
TL & SE After
TE586.86
1383.542120.18
2594.023071.18
4164.322002
20032004
20052006
2007R
OE
2.420.96
0.640.52
0.577323.76
7975.249547.68
9751.0210798.28
11990.12
Debt to Equity - A
fter Restatem
entTL/TE
TL6591.7
7427.57157
7727.17825.8
TE586.86
1383.542120.18
2594.023071.18
4164.32D
/E4.76
3.502.76
2.521.88
Z-Score - After Restatem
entC
L2,003
2,0042,005
2,0062,007
WC
51,100,0008,300,000
14,100,000-45,910,000
455,800,000TA
7,478,800,0008,672,900,000
8,507,100,0009,138,000,000
10,112,000,000R
/e7,433,000,000
8,223,900,0008,968,100,000
9,643,700,00010,627,500,000
EB
IT1,917,800,000
2,122,100,0002,215,000,000
2,160,500,0002,653,100,000
MV
E39,720,000,000
39,720,000,00039,720,000,000
39,720,000,00039,720,000,000
BV
L6,591,700,000
7,427,500,0007,157,000,000
7,727,100,0007,825,800,000
Sales
9,903,400,00010,584,200,000
11,396,900,00012,237,700,000
13,789,700,000TA* R
std7,975,240,000
9,547,680,0009,751,020,000
10,798,280,00011,990,120,000
20032004
20052006
20071.2(W
C/TA
*)0.007688797
0.0010431850.001735203
-0.0051019240.045618
1.4(RE/TA*)
1.3048133971.205890855
1.2875924781.250308382
1.2408973.3*(EB
IT/TA*)0.793548533
0.7334692830.749613887
0.660257930.730204
.6*(MV
E/BVL)
3.61545583.208616627
3.3298868243.084210118
3.0453121*(S
ALE
S/TA*)
1.2417682731.108562499
1.1687905471.133300859
1.150089
Z-SC
OR
E R
std6.9632748
6.2575824496.537618938
6.1229753656.212118
154 | P a g e
References
Business Analysis & Valuation
Wall Street Journal.com
Morningstar.com
St.Louis.com
Investopedia.com
SupplyChain Digest
Colgate-Palmolive 2007 10-K
Credit-to-cash advisor.com
Spirefire.com
Proctor & Gamble 10-K
Clorox 10-K
Church & Dwight 10-K
Colgate.com
Yahoofinance.com
CNNmoney.com